Is the Carnival share price a bargain as cruising rebounds?

Carnival (LON: CCL) share price has staged a strong comeback from its lowest level this year as the cruise industry rebounds. The stock was trading at 730p on Wednesday, which was about 52% above the lowest level this year.

Debt concerns remain

Carnival Corporation is the biggest cruise company in the world with 24 ships. It competes with companies like Norwegian and Royal Caribbean. In terms of Revenue, Carnival made over $20 billion in 2019 compared with Norwegian’s $6.5 billion and Royal Caribbean’s $10.9 billion.

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These companies have been tested by fire in the past two years since they are considered as non-essential. Further, unlike airlines, they are incorporated in tax havens, which made it impossible for them to receive federal funding.

As a result, Carnival’s long-term debt soared from about $9 billion in 2019 to the current $28 billion. By selling debt and shares, the firm’s total cash on hand rose from $518 million to over $7 billion. Adding short-term borrowings of $2.6 billion, the firm’s net debt stands at about $21 billion.

Carnival interest payments rising

With interest rates rising, Carnival has seen its interest expenses soar. They rose from $206 million in 2019 to over $1.5 billion. As a result, as I wrote in this article, there is the lingering risk that the firm will default on its obligations. In August, Moody’s downgraded the firm’s credit rating from B1 to B2. The statement said:

“The B2 also reflects the risk around the company’s ability to generate sufficient free cash flow to materially reduce debt, particularly in a rising interest rate environment. Moody’s forecasts that Carnival’s debt/EBITDA will exceed 7x in 2023 and a higher interest burden and new ship purchase commitments over the next two years will constrain cash flow.”

Carnival made a private offering of $1 billion in November that will mature in 2027. These funds will be used to make principal debt payments on debt and general corporate purposes.

On a positive side, Carnival and other cruise companies are reporting strong demand as Covid fears ease. The concern is that this recovery will not be as fast as what analysts were expecting.

Carnival share price forecast

The daily chart shows that the Carnival stock price has been in a slow recovery in the past few days. It has managed to move from the year-to-date low of 484p to the current 730p. The stock has also moved slightly above the 25-day and 50-day moving averages while the MACD has moved slightly above the neutral level.

Therefore, in the near term, the shares will likely resume the bullish trend as buyers target the key resistance at 840p. A drop below the support at 680p will invalidate the bullish view.