Shares of the world’s largest cruise operator, Carnival (NYSE:CCL)(NYSE:CUK), fell 10.8% in June, according to data from S&P Global Market Intelligence. The stock declined after a strong performance year to date in anticipation of an economic reopening and travel boom. But shares fell in June as the delta COVID-19 variant delayed some cruise restarts in Europe. In addition, the company announced a share-sale program toward the end of the month, causing investors to fear more dilution.
Carnival shared a second-quarter update during the month, which could have actually been interpreted as a positive. At the end of the quarter, the company had $9.3 billion in cash, which management said was enough to return to full cruise operations by 2022. Currently, about 35% of Carnival’s fleet is either back cruising, or set to resume by the end of the third quarter, with another 20% set to restart before the end of the fourth quarter.
CEO Arnold Donald also said the company should resume full operations by spring of 2022. Management also pointed out that 2022 bookings are ahead of 2019 levels, which was already a strong year in cruising.
So why did shares fall? Carnival announced the cancellation of two of its Holland America cruises this summer, as the company continues to negotiate restarts with European governments. After a strong stock run into June, further delays were enough to sour investors on a full restart, perhaps causing some to take some profits.
Additionally, Carnival announced a $500 million at-the-market share sale program on June 28, which means Carnival will be able to sell stock in the market opportunistically. With the company having already heavily diluted its stock and taken on lots of debt during the COVID crisis, this may have dismayed investors.
However, this might have been a misunderstanding. Carnival has two classes of shares, one listed in the U.S. and the other in the U.K., with the latter currently trading at a discount. So Carnival is only going to sell shares in the market if it can then repurchase its shares listed in the U.K. at a cheaper price. So it’s likely there won’t be any dilution — in fact, quite the opposite.
Shareholders shouldn’t worry too much about these developments in June. The cruise delays have a relatively minor impact, and the share sale was likely misunderstood. But Carnival has rebounded strongly from the depths of the pandemic, and its share price still reflects a successful return to cruising in the future. So further gains might require more good news, rather than just a lack of bad news. Demand for cruising should be strong coming out of the pandemic, as bookings have shown, but investors do need to watch out for new COVID variants as well.
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