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In a note to clients on Monday, HSBC analyst Ali Naqvi reiterated a downgrade on Carnival Corporation (NYSE: CCL) stock as cost and debt concerns continue to weigh on the stock.
Naqvi admitted that the bookings reported by the company in its recent earnings release was cited as particularly strong, while demand has steadily increased throughout the summer. However, he remained cautious given the prospect that a deeper recession scenario severely reduces demand and potentially provokes cancellations which, in turn, would raise liquidity concerns alongside rising costs.
He noted that cost comments for key competitors Royal Caribbean ( RCL ) and Norwegian Cruise Line Holdings ( NCLH ) prompted cuts to forecasts of a recovery in the second half of 2022. For example, Norwegian changed its outlook for the second half of 2022. after 2022 from a profit to a net loss. The potential softening of demand for Carnival could be particularly worrisome given its high debt levels.
“Although the company aims to downsize organically in the medium term, we think this will take more than three years, suggesting that further capital raising cannot be ruled out, nor possible vessel/brand sales, Naqvi advised. “The company has several significant debt maturities over the next two years and will need to refinance these debt maturities at higher interest rates, further increasing the cost of debt for the company.”
Given the growing concerns, Naqvi cut his price target to $6.80 from $7.70 previously. The new target suggests a little more than 35% downside from Friday’s closing price. He also reiterated an equal sell rating, an outlook he has maintained on the stock since January 2021. Shares of the Miami-based cruise operator have fallen in value by about 75% since that point.
Read more on recent volatile share price action for cruise stocks.
