The disaster that started it all for the cruise liner industry – the now scandalous Diamond Princess fiasco – is technically under the Carnival (NYSE:CCL) umbrella. However, that’s about the only good news for rival Royal Caribbean Cruises (NYSE:RCL). At the beginning of the year, RCL stock closed above $133. Following the Mar. 24 session, shares fell to $28.19, despite gaining a very hearty 18.4% on the day.
For those that are tempted to buy RCL stock on the dip, I’d avoid the urge. If this were any other company or industry-related scandal, perhaps the extreme fallout would make sense. After all, people always go on vacation. Furthermore, cruises represent a relatively inexpensive way to see the world. Anecdotally, I know many folks that have gone on cruises and they all love it.
Prior to the coronavirus pandemic that brought nearly all industries to a standstill, I’d say the common motivator for taking cruises was that the price is right. Now, we’re in a situation where no price is cheap enough. Frankly, you couldn’t pay me to go on one of those things and I’m sure I’m not the only one. Obviously, that’s not the sentiment you need for RCL stock.
A few days ago, CNN Travel reported that at least 30 cruise ships are at sea right now. Many boarded weeks-long journeys despite the coronavirus becoming a rapidly growing threat. For them, cancellation was too steep a cost.
Today, their dream vacations have turned into a nightmare. If the Diamond Princess is anything to go by, they can look forward to crackdowns and forced quarantines. And that’s if or when anybody agrees to let them dock.
RCL Stock Amid the Sector’s Biggest Black Eye
For Royal Caribbean, Carnival, Norwegian Cruise Line (NYSE:NCLH) and other related organizations, the best they can hope for is that the pandemic fades quickly. Logically, the longer the coronavirus lingers, the more it is associated with the cruise liner industry.
On one hand, the infection curve has started flattening in prior hot spots like China and Italy. Yes, both countries currently feature higher total infection numbers, but their respective growth rates have declined overall.
On the other hand, the U.S. has charted a worrying trend. Unlike every other nation with a major coronavirus outbreak, cases here are accelerating with the passage of time. In fact, our crisis is far worse than China’s on an apples-to-apples comparison. Unfortunately, this presents huge demand headwinds for RCL stock.
At the time when community spread first occurred in the U.S., China, and Italy, coronavirus cases numbered 75, 62, and 79 respectively. Let’s call this “day one.”
From that point until the end of a seven-day interval, the compound annual growth rate (CAGR) of cases in the U.S. measured 34%. CAGR for China and Italy were 54.1% and 49.7%, respectively.
In the second seven-day interval, CAGR for China and Italy dropped to 40% and 26.6%, respectively. However, for the U.S., the CAGR declined very slightly to 32.6%. Then, in the third interval, U.S. CAGR jumped to 36.9%, whereas the growth rate for China and Italy dropped noticeably to 17.6% and 20.1%, respectively.
Truly, you must appreciate the absurdity of our crisis. In a very real sense, the coronavirus growth trend in the U.S. is violating natural mathematical harmonics. By now, with domestic cases breaching the 46,000 mark, you’d expect the law of large numbers to stem the tide.
Simply, that’s not happening.
Facing a Worst-Case Scenario
In a bizarre piece, CBS News reported that 38% of American beer drinkers won’t order a Corona beer. Why? In their mind, they associate Corona beer with the coronavirus. Apparently, this fallacious and absurd reasoning has negatively impacted sales.
In late January, Constellation Brands (NYSE:STZ) issued an equally bizarre statement that their consumers understand that there is no linkage between the beer and the virus. Honestly, I feel sorry for the company that they must make such clarifications.
Perhaps in a macabre manner, this is nature’s way of culling the population.
But what happens when there is a legitimate connection between the coronavirus and a specific industry? In the best of times, cruise ships are giant petri dishes. But with this pandemic, they’ve turned into floating prisons – which you pay for!
This is such a black eye for RCL stock and the whole lot. I’d stay away until the full damage has been priced in.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.