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S&P Cut Carnival to ‘Junk,’ More Downside Ahead?

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Carnival (NYSE:CCL) stock fell 5.3% in today’s pre-market trading session at 4:44 AM ET. The stock fell after S&P (Standard & Poor’s) cut the company’s credit rating to “junk” status or non-investment grade. S&P expects the cruise industry to face weak demand due to the COVID-19 pandemic.

S&P downgraded Carnival’s unsecured bonds to BB- from BBB- and its secured bonds to BB+ from BBB-. The cruise operator’s overall issuer credit rating was downgraded to BB- from BBB-. According to a Reuters report, “We forecast that the company’s credit measures will remain very weak through 2021 and anticipate that its adjusted leverage may potentially exceed 10x in 2021 following a significant deterioration in its performance in 2020, S&P said in a statement.” S&P also cautioned that Carnival could get downgraded again. Last month, Moody’s Investor Service downgraded Carnival’s rating to non-investment grade.

At 5:10 AM ET today, Norwegian Cruise Line (NASDAQ:NCLH) and Royal Caribbean Cruises (NYSE:RCL) stocks fell 4.4% and 3.5%, respectively. At the same time, the S&P 500 futures fell 0.59%, while the Dow futures declined 0.65%.

Carnival’s preliminary results for Q2

So far, 2020 hasn’t been a good year for Carnival. The company’s business has been crippled by the coronavirus outbreak. Last week, the cruise operator reported its preliminary results for the second quarter of fiscal 2020, which ended May 31. Carnival swung to a fiscal second-quarter net loss of $4.4 billion or $6.07 per share from net income of $451 million or $0.65 per share in the same period last year. Excluding the impact of one-time items, like a $2.0 billion non-cash impairment charge, the adjusted net loss was $2.4 billion or $3.30 per share from an adjusted net income of $457 million or $0.66 per share in the same period last year. Carnival’s total sales declined 86% YoY (year-over-year) to $0.7 billion in the second quarter of fiscal 2020. However, Wall Street analysts expect the company to report an adjusted EPS of -$2.05 on revenue of $439.4 million.

Currently, Wall Street analysts expect a -60.3% and 66.5% growth in the company’s fiscal 2020 and 2021 revenues, respectively. Analysts also expect an adjusted EPS of -$5.27 and -$1.15 in fiscal 2020 and 2021, respectively.

Analysts’ recommendations and target price

Based on Reuters data, among the 20 analysts tracking Carnival stock, 65% recommended a “hold,” 20% recommended a “buy,” and 15% recommended a “sell.” The consensus target price of $16.39 per share implies a downside of 8.9% based on Carnival’s closing price on Tuesday. The consensus target price for the stock has declined from $18.03 last month—a reduction of 9.1%.

On Tuesday, Deutsche Bank analyst Chris Woronka increased its target price on Carnival by $2 to $13 and maintained a “hold” rating. According to a report from TheFly, “Although cruise stocks have backed off their June 8 highs, a curiously healthy dose of optimism about the out-years remains…The analyst believes in the idea that the industry’s key players are undertaking actions that will ultimately allow them to emerge from the COVID-19 downturn in the best possible position to restore profitability.” The report also said, “However, Woronka still thinks the group has come too far, too fast and he’s wary of certain Street forecasts that seem to imply more of a V-shaped recovery in cruise earnings.”

Stock returns

On Tuesday, Carnival stock rose 4.5% and closed at $18.00 with a market cap of $13.0 billion. The stock has fallen 11.9% in the trailing five-day period, while it has fallen 61.4% in the trailing 12-month period. Carnival stock is trading 65.3% below its 52-week high of $51.94 on January 17. The stock was trading 130.8% above its 52-week low of $7.80 on April 2. So far this year, the stock has declined 64.6% as of Tuesday.

On Tuesday, Carnival stock was trading 4.4% below its 20-day moving average of $18.83. The stock is trading 15.3% above its 50-day moving average of $15.61 and 13.9% below its 100-day moving average of $20.90.

To learn more about Carnival, read What Should You Do with Carnival Stock Right Now? and Carnival’s Preliminary Q2 Results: Good and Bad. You could also read Buy Carnival Stock before It Makes Another Big Move.

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