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Takeaway: FQ2 results don’t mean much, but forward commentary a net negative. Best Idea Short.

Editor's Note: Below is a complimentary institutional research note written by our Gaming, Lodging, and Leisure (GLL) analyst Todd JordanIf you are an institutional investor interested in accessing our research email sales@hedgeye.com

$CCL | Pre-Announcement A Net Negative - 6 18 2020 12 00 51 PM

HEDGEYE EDGE

Following a solid few weeks of positive momentum, the tide might be turning for the cruise stocks as the companies address their return to service plans and acknowledge the industry turmoil. Carnival Cruises (CCL) got out ahead of their usual fiscal reporting timing to provide a preliminary update on FQ2 but more importantly to comment on where their business is headed. 

We view the forward commentary as a net negative.  Details regarding a fleetwide return to service were limited but the company did reaffirm it will be phased and cater to only a few ports initially.  Some of CCL’s brands have guided to return to service delays, but we think ultimately CCL will follow NCLH’s decision yesterday and push out their entire company’s return to service to September 30th or later. 

Additional months of cruise delays might not matter as much for 2020 expectations (throwaway year at this point), but we suspect that the impact will become even more visible in both pricing/bookings commentary, deposit outflows, and liquidity position.    

THOUGHTS ON THE RELEASE COMMENTARY  

Despite today’s release today being less comparable to prior quarter language, we read CCL’s 2021 commentary as a net negative, and confirms our prior views that 1) pressure on deposits was going to be very challenging in the short term, 2) CCL is likely discounting to spur incremental demand, and 3) demand for future sailings is falling short, even with the discounting. 

Sure, CCL did suggest that they have seen some sequential uptick in bookings, and that they are still “within historical ranges” cumulatively, but they did offer that booking levels are running “meaningfully behind.” 

To us, the next shoe to drop will be the commentary around their “cumulative position” as the impact of no cruising in the summer and potentially early fall begins to materially impact historical pre-WAVE booking patterns.  From here, unless the trajectory of our pricing survey begins to change, the risk is to the downside with respect to 2021 commentary. 

Separately, liquidity and cash burn rates cited in the release should generally fall in line with consensus expectations; however, we’re growing more concerned about CCL’s deposits balance as we look out into next year in the context of a potentially challenged Fall/Winter selling season (cruising will just be starting back up) and the large amount of additional deposits that will need to recognized as revenue. 

The pressure will be on to spur additional demand and we think CCL will likely go the route of additional ticket price discounting, a bad omen for the recovery (takes time to rebuild price discipline) and ’21 yields. 

While GLL stocks may be getting a bid as the US economy reopens and there continue to a flurry of positive anecdotes on leisure demand trends (pent up), we don’t see that narrative as credible with respect to the cruise stocks. 

The reopening trade continues to be pushed out and the stocks are certainly not “cheap” when appropriately discounting for the lengthy earnings recoveries. For CCL in particular, we reiterate our Best Idea Short.