By Will Ebiefung – Oct 17, 2022 at 8:45AM
  • Carnival Corporation is trying to recover from effects of the COVID-19 pandemic.
  • But investors should think twice before betting on a rebound.
  • The cruise line faces three big headwinds: the economy, debt, and competition.

There is a rare buy alert from the company.

Carnival Stock Quote Price as of October 18, 2022, 4:00 p.m. ET

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Carnival Corporation has probably landed on some value investor's radar. A cheap stock is not always a good deal. There are three red flags that could cause the cruise company to lose money over time.

1. The massive debt load 

Carnival was hurt by the CDC's no-sail order for much of 2020. Debt markets were used to survive the crisis.

Carnival's long-term debt increased to $28.6 billion at the end of the third quarter.

Cruise ship sailing at sunset.

The image came from the same source as the one above.

There are a lot of recent results. The company had an operating loss of $279 million in the third quarter, compared to an interest expense of $422 million.

2. Macroeconomic headwinds

Carnival's debt situation is exposing it to macroeconomic challenges. As of September, the US' annual inflation rate stood at 8.2%. Higher energy and material costs erode Carnival's margins and make it more difficult to achieve.

Carnival is a debt-laden business and rising interest rates are a challenge because they could increase the interest payments on its variable-rate loans. Carnival would be in another consumer demand-related crisis before it recovers from the previous one if the global economy were to go into recession due to higher rates.

3. Better alternatives 

Debt and operational losses are the same problems faced by the entire cruise industry. Carnival seems to have emerged from the crisis in a weaker position than Royal Caribbean which has fallen 45% since the start of the year. Royal Caribbean may have something to do with its out performance.

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Royal Caribbean expects to make a profit in the third quarter, unlike Carnival, which made a net loss.

The rival company expects adjusted earnings before interest, taxes, depreciation, and amortization to be between $700 million and $750 million. i ts balance sheet has less long-term debt than Carnival has.

Carnival stock has a P/S multiple of 0.87, which is lower than Royal Caribbean's stock, which has a P/S multiple of 2.47 Cheap shares don't always mean a good deal.

Avoid Carnival Corporation 

There is a triple threat of massive debt, worsening macroeconomic conditions and healthier rivals. It's likely that investors should avoid the stock because it's likely that they'll lose money over the long term.

Will Ebiefung has no position in any of them. The company recommended Carnival. There's a disclosure policy at the Motley Fool.

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