Carnival Corporation: New COVID Variant Adds To Cruise Operator's Woes

Even before the news of the Omicron variant of COVID-19 emerged, Carnival Corporation (NYSE:CCL) was having a very difficult year. But the news sent the shares of the Miami-based leisure travel company which operates cruise ships under various brand names, even lower. The stock is now down almost 18% over the past 12 months.

The shares closed above $31 as recently as the start of June and remarkably the market now assesses that CCL’s value is lower than it was one year ago, when the consensus rating on CCL at a price of $17.30 is bullish and the consensus 12-month price target is 59.5% above the current share price.

Source: Investing.com

The Wall Street consensus outlook for CCL has improved dramatically since February. Back then, the consensus 12-month price target was about $19.50, as compared to $28.8 today (averaging the Investing.com and E-Trade values). CCL’s decline, in conjunction with the higher price targets, results in the massive 12-month expected returns in the current consensus outlooks.

One potential shortcoming in using the Wall Street consensus as guidance is that news may have emerged since an opinion was rendered and one or more analysts may not have had time to update their views.

In other words, the analyst opinions may be out of date. Certainly this is a concern with the recency of the Omicron variant’s emergence. In addition, the high dispersion among the individual analysts is important to consider.

Market-Implied Outlook for CCL/h2

I have analyzed options on CCL expiring on Mar. 18, 2022 to calculate the 3.6-month market-implied outlook (from now until that expiration date). I have also calculated the 6.5-month market-implied outlook for the period from now until June 17, 2021.

The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal.

Source: Author’s calculations using options quotes from E-Trade

The market-implied price return outlook for the next 3.6 months is fairly symmetric, but the peak probabilities are shifted to favor negative returns over this period. The maximum-probability outcome is a price return of -5.4% over this period. The annualized volatility calculated from this distribution is 67%. The estimated worst 1-in-5 outcomes over the next 3.6 months (the 20th percentile) is a loss of -27% or worse.

To make it easier to directly compare the probabilities of positive and negative return, I rotate the negative return side of the distribution about the vertical axis (see chart below).

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

With this view, it is evident that the probabilities of negative returns are consistently higher than for positive returns of the same magnitude (the dashed red line is above the solid blue line over most of the chart). This is a slightly bearish outlook for CCL for the next 3.6 months.

Looking out to the middle of 2022, using prices of options that expire on June 17, 2022, the 6.5-month outlook is strongly bearish. The peak probability corresponds to a price return of -20.7% over this period and the probabilities of negative returns are substantially and consistently higher than for positive returns of the same magnitude. The annualized volatility calculated from this distribution is 60%.

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

Summary/h2

Carnival Corp. faces continuing hardship and uncertainty as the world contemplates the potential impact of the Omicron COVID-19 variant. The Wall Street analyst consensus is neutral or bullish and the consensus 12-month price targets for CCL are in the range of 60%-70% above the current share price.

The Wall Street consensus suggests that the shares are substantially oversold, even in light of the difficult environment. The high dispersion among the individual analyst price targets leads me to discount the consensus for gains.

The market-implied outlook, which reflects the consensus views of buyers and sellers of options, is modestly bearish between now and the middle of March, becoming substantially more bearish by the middle of the year.

The expected volatility is quite high, as would be expected. Considering the enormous uncertainties in trying to predict CCL’s path forward, along with the disagreements between the Wall Street consensus outlook and the market-implied outlook, I am maintaining my bearish outlook on CCL.

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Written By: Geoff Considine, Ph.D