Carnival (CCL) will report earnings before the market opens on Tuesday. The options market implies a large earnings-related move of about 8%, well above the company’s average earnings-related move of 5% since mid-2013. We’ll review select transactions that generate some revenue as a result. Investors want to know whether the cruise industry can maintain strong bookings from the beginning of the year through the end of 2024. Carnival was one of the companies affected by the cargo ship collision and subsequent collapse of the Francis Scott Key Bridge because of its operations at the Port of Baltimore. However, the company does not expect the temporary relocation of these operations to Norfolk, Virginia, to have a meaningful impact. Another question investors may be concerned about is when Carnival will resume paying dividends. The company suspended its dividend in early 2020 due to pandemic-related shutdowns, but expects to resume it as soon as business returns to normal. With revenue nearly 20% above 2019’s pre-pandemic levels and forward estimated free cash flow exceeding 2019’s pre-pandemic dividend payment of $1.5 billion, investors may believe this will happen sooner or later. Full-year EBITDA in 2024 is expected to be approximately US$5.7 billion, higher than the pre-epidemic high of US$5.6 billion in 2019 (not taking into account inflation). However, total debt of $32 billion is almost three times what it was before the pandemic. Management may delay recovery for a while. Carnival is currently valued at 8x EV/EBITDA and less than 13x forward earnings forecasts, which is quite reasonable, especially given global conflicts and, as I’ve written before, their demographics tend to The more affordable end of the spectrum, a consumer group, may generally be more vulnerable to price increases caused by several years of well-above-average inflation. Dividends and debt levels have important effects on a stock’s volatility, option prices, and the relationship between put and call option prices. All other things being equal, higher levels of corporate debt increase leverage and thus increase the volatility of a company’s equity. Carnival’s revenue is 20% higher than before the pandemic, as is its enterprise value. Therefore, the ratio of enterprise value to sales is roughly the same. However, the company’s debt levels are much higher, so we’d expect the stock volatility to be much higher as well. The more volatile the stock, the higher the price of the option. Carnival’s current option price is nearly double what it was at the end of 2019, but higher debt levels justify a price increase. Because the stockholder is entitled to the dividend but the holder of the call option on the stock is not, as the dividend increases, all else being equal, the value of the call option relative to the value of the corresponding put option will decline. So if the dividend is expected to increase, or in Carnival’s case, resume, owning a call option may not be the best way to bet on the stock long-term, even if the dividend increases the demand to hold the stock — which many investors prefer to pay Dividend stocks. Generally speaking, we prefer to sell covered calls on our long Carnival position as the company pays down debt, grows bookings and free cash flow, and expects to resume its dividend. Generally, we don’t recommend selling covered calls for income unless the option price is very high, as income provides a catalyst that can move the stock. In this case, the 8% implied move is quite large, but given the high debt levels, it only represents a fair price for the options. The Trade: Sell $18 Calls on June 19 If you start buying-selling before earnings, the yields will be attractive, but waiting until after earnings is fine. I just don’t expect to get the same yield as buying now. Disclosure: (None) All opinions expressed by CNBC Pro contributors are theirs alone and do not reflect the opinions of CNBC, NBC UNIVERSAL, its parent company or affiliates, and may have been previously published by them on television, radio, the Internet or spread on other media. The above is subject to our Terms and Conditions and Privacy Policy. This content is for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not apply to your particular situation. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor. Click here to view the complete disclaimer.
