Miami-headquartered cruise operator Carnival (NYSE:CCL) recently received some positive news as the Centers for Disease Control and Prevention (CDC) has ended its Covid-19 Program for Cruise Ships.
Don’t get too excited yet, though. CCL stock could still head lower as Carnival’s planning a massive share sale. Plus, an analyst is suggesting that the company’s share sale could precipitate “panic” among Carnival’s investors.
Carnival is a leader among U.S. cruise line operators. If you’re going to wager on a recovery in travel and leisure, owning Carnival shares makes sense — or so it seems.
Yet, investing in Carnival can be a risky business. Granted, a U.S. regulator just eased up on its monitoring of cruise ships, and that’s a positive sign. There’s also a worrisome development afoot, though, as Carnival takes what might be considered a drastic measure to raise much-needed capital.
What’s Happening with CCL Stock?
Believe it or not, CCL stock is threatening to revisit its Covid-19 crisis low of around $8.50 from March 2020. That’s a painful reality for Carnival’s investors to face, as the shares were worth $26 as recently as September of 2021.
Does this mean that Carnival shares are a screaming bargain right now? Not necessarily. Bear in mind that Carnival has no price-to-earnings ratio (P/E) ratio because it’s not a profitable business. On a trailing 12-month basis, Carnival’s earnings per share (EPS) is -$8.31. That’s discouraging, considering the share price was $9 and change recently.
This isn’t to suggest that all of the news surrounding Carnival is hopeless. As I reported not long ago, the CDC is terminating its Covid-19 Program for Cruise Ships. This means that the CDC will cease reporting Covid-19 risk levels for U.S. cruise ships. It suggests that the CDC is, to a certain extent, trusting that America’s cruise lines can effectively monitor themselves.
Let’s Call It Panic
The CDC’s easing of cruise-ship monitoring may inspire confidence in some CCL stock investors. However, there’s another development that could be a cause for concern among Carnival’s shareholders.
In a press release, Carnival revealed that it has priced an underwritten public offering of 102,139,621 shares of common stock. On top of that, Carnival “granted the underwriter a 30-day option to purchase up to 15,320,943 additional shares of common stock of the Company.”
It’s no secret that Carnival has a sizable debt load. The company even admitted in the press release that the net proceeds from the offering “could include addressing 2023 debt maturities.”
The primary concern here is the prospect of share dilution. In fact, Stifel analyst Steven Wieczynski calculated that the offering will dilute Carnival’s shareholders by roughly 8.5%.
Additionally, Wieczynski suggested that the offering could have ripple effects on Wall Street. “This equity raise will cause concern (actually let’s call it panic) across the investment community for sure,” the Stifel analyst cautioned.
What You Can Do Now
A shift to self-monitoring is a good sign for America’s cruise shop operators – no doubt about that. Still, Carnival’s planned share sale should remind investors that the company is in dire need of capital.
Even beyond the share dilution concerns, prospective investors should consider the possibility of panic selling that Wieczynski seems to be hinting at. Hence, CCL stock could head lower and traders would be wise to stay on the sidelines for now.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.