The easyJet (LSE: LON:EZJ) share price is down by nearly 60% this year. Cruise ship giant Carnival (LSE: NYSE:CCL) — whose brands include P&O and Princess Cruises — has fared even worse. The Carnival share price has fallen by more than 70% since the start of 2020.
The situation is serious, but nothing lasts forever.
On Thursday, easyJet shares rose after the firm said it planned to start flying a limited schedule from 15 June. Carnival plans to restart operations with eight of its ships at the start of August.
Both companies have strong brands and a big share of their respective markets. If the travel sector recovers quickly, then I reckon these shares could deliver big gains. Now could be a good time to buy.
Customers want to get moving Will holidaymakers still want to fly or cruise after the coronavirus pandemic? I reckon they will, and early numbers from both companies seem to support this view.
In April, easyJet said that it had opened up its winter season flights for bookings earlier than usual. Bookings were said to be “well ahead” of the same point last year, including customers rebooking cancelled flights.
Carnival says that bookings for 2021 are “within historical ranges”. The firm also says that 62% of customers affected by cancellations have accepted vouchers instead of a cash refund.
Two big benefits These trends are important for two reasons. Customers who are willing to rebook clearly expect life to return to normal. They still want to travel, so future demand should be okay.
There’s also a direct financial benefit from customers accepting vouchers and rebooking. Both Carnival and easyJet hold significant amounts of cash from customer deposits. They have to return this cash if they issue a refund, but they can keep it if a customer accepts a voucher. With zero revenue coming in at the moment, that’s a big benefit.
Carnival vs easyJet shares As an investment writer, I’ve followed easyJet for a number of years. In my view, this is a good business. Although profit margins have historically been lower than at rival Ryanair, this crisis gives management an opportunity to address this. I suspect some of easyJet’s cost-saving measures will become permanent.
The main risk facing easyJet shareholders is that the business could run out of cash. I think this is unlikely. Based on the latest information from the company, I think easyJet has enough cash to survive in lockdown until the end of 2020.
Although it may take a little time to repay the extra debt it’s drawn on during the pandemic, I feel easyJet shares look good value at under 600p.
The situation at Carnival is a little riskier, in my view. Although I’m confident that this business will recover, I estimate the group has around $15bn in debt, some of which carries interest rates or more than 10%.
I suspect that at some point, a wider financial restructuring will be required to put Carnival’s finances onto a more sustainable footing. Shareholders could face some dilution.
So could you make a million by investing in easyJet or Carnival shares? I think that difficult market conditions and rising debts will create tough headwinds. Although I could see both stocks doubling over time, I don’t think they’ll deliver the kind of big gains you need to make a million.
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Roland Head owns shares of Carnival. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020