As with airlines, cruise line companies like Royal Caribbean (NYSE:RCL), have taken a huge hit due to the outbreak of the novel coronavirus. But unlike airlines, the cruise companies are unlikely to bounce back relatively quickly and could conceivably declare bankruptcy. Consequently, investors should avoid RCL stock and other publicly traded cruise companies.
It turns out that Royal Caribbean and other cruise companies will not be able to access the $500 billion that the U.S. government has set aside to help companies that are reeling as a result of the coronavirus because the cruise sector, in a move that turned out to be quite disastrous, incorporated outside of the U.S. in order to avoid paying American taxes.
And although President Donald Trump has indicated that he’s willing to provide funds to the sector, Democrats have said that they’re opposed to a bailout of the sector. As a result, it’s unlikely to happen.
Royal Caribbean recently said that it now has access to $3.6 billion of funds. That sounds like a lot of money, but it may not be nearly enough. Barron’s recently reported that the sector has high fixed costs.
According to the publication, Wells Fargo analyst Timothy Conder recently estimated that one of Royal Caribbean’s competitors, Carnival (NYSE:CCL), would “need to soon issue $4 billion to $5 billion of equity, diluting existing shareholders,” even though it had obtained $3 billion of loans.
Conder warned that Carnival’s net debt would exceed 300% of its earnings before interest, depreciation, taxes and amortization. As a result, the company will exceed the maximum debt-EBITDA ratio allowed by the covenants it made with its bondholders, the analyst reported.
Companies that violate covenants may have to repay their entire loans or bonds early, potentially triggering bankruptcy. I was unable to determine if Royal Caribbean has similar covenants on its loans or bonds, but there’s a good chance that it does. The triggering of such covenants could very well result in disaster for the owners of RCL stock.
Royal Caribbean and other cruise ships may experience very low demand for a long time which would likely trigger any covenants they have.
Low Demand for a Very Long Time
Unfortunately, during the coronavirus crisis there has been real suffering aboard many cruise ships for very long periods of time. People have had to stay aboard ships for weeks longer than scheduled as coronavirus spread to dozens of passengers. Further, the passengers had to stay in their tiny cabins much of the time.
For two reasons, the suffering aboard cruise ships isn’t comparable to past disasters that afflicted cruise ships. First, not just one ship, but many ships, were affected. Second, the overall news coverage of the situation was more intense and lasted much longer than in previous cases.
A vaccine, a drug that easily cures all coronavirus cases without intense side effects, or a prophylactic drug without bad side effects could solve the problem, but it could be six months or more before any of those possibilities become reality. By that time, Royal Caribbean could be bankrupt. Moreover, between now and then RCL stock will almost definitely drop way below its current levels.
Cruise Ships Versus Airplanes
Meanwhile, airlines are in a much better position to recover than cruise ships. Although people may have contracted coronavirus aboard airplanes, they weren’t trapped in them for weeks.
Further, there are many ways to vacation other than cruise ships; there’s really no way to quickly get from one part of the country or the world to another than airplanes.
Finally, business travel will probably recover way before leisure travel because companies generally need face-to-face meetings and conferences more than consumers need to travel. Of course, airlines benefit from business travel while cruise ships don’t.
The Bottom Line on RCL Stock
Cruise ships have received extensive bad publicity during the coronavirus crisis and a 100% effective cure or vaccine for coronavirus probably won’t be made widely available for at least six months.
As a result, the demand for cruises is likely to remain extremely low for a long time. There are indications that Royal Caribbean may not remain in business for that long. And even if it does remain afloat, it will probably have to issue much more stock, while short sellers will continue to bet against its shares.
Further, for those who believe that the coronavirus crisis will soon largely be over, airline stocks are a much better bet.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any shares of the aforementioned companies.