On April 23, Stifel analyst Steven Wieczynski raised Royal Caribbean’s (NYSE:RCL) target price from $40 to $48. He also kept his buy rating on RCL stock. That’s good news.
The bad news: Newspapers such as The Washington Post continue to write damaging articles about the cruise ship companies and how they kept sending ships out to sea even though they knew the vessels were floating petri dishes.
No amount of public relations is going to make the situation get better overnight. The cruise operators, collectively, messed up, and all of their stock prices have taken a significant hit as a result. Royal Caribbean stock is down 74% since it hit a 52-week high in mid-January.
There is no question risk-averse investors should have nothing to do with Royal Caribbean, Carnival (NYSE:CCL), or Norwegian Cruise Line Holdings (NYSE:NCLH) at this stage of the proceedings.
They’ve all added significant debt to their balance sheets in recent weeks, with more likely to come. And anyone who follows the cruise industry knows ships aren’t cheap to build, so debt levels are high even at the best of times. The good part about this industry norm is that the barriers to entry are enormously high. You can’t just wake up one morning and start a company like Royal Caribbean.
However, if you are an aggressive investor, RCL stock has big-time potential gains on the horizon, but you’ve got to be able to handle significant volatility. If you can get past this factor, I think you’d be crazy not to jump all over it. Here’s why.
RCL Stock Might Drop Some More
Royal Caribbean’s stock traded below $35 on four occasions since the beginning of 2000: March 2000 to December 2003, March 2008 to October 2010, August 2011 to July 2013, and March 2020 to April 24. Excluding the current downturn, the average length trading below $35 was 34 months; that’s two months shy of three whole years at this level or lower.
For one day in mid-March, its stock traded below $20, before rebounding to current levels in the mid-$30s. Given the future of cruising is uncertain, it’s possible Royal Caribbean’s stock price could revisit the teens. That’s especially true if the “B” word becomes a possibility. According to Macroaxis.com, Royal Caribbean has a 55% chance of experiencing financial distress in the next 24 months, forcing it to file for bankruptcy. That’s 33% higher than consumer cyclical stocks as a whole.
So, it’s entirely possible that investors will get a better entry point. My InvestorPlace colleague, Josh Enomoto, definitely feels this is the case. However, he believes all of the cruising stocks are a big-time sell.
“But the kicker for me is that if some people are able to vacation, they probably won’t choose cruise ships,” he wrote on April 20. “Not only did the rapid spread of Covid-19 aboard vessels frighten customers across the globe, the resultant governmental response is arguably worse. What could possibly be more stressful than facing a pandemic stranded in foreign waters?”
While Josh’s argument makes logical sense, people aren’t always rational.
Approximately 14.2 million of the 28.5 million cruise passengers in 2019 came from North America. Unless those people suddenly find a better option, I find it hard to believe they won’t go back to cruising once all the excitement has died down, and the cruise industry has come up with a gameplan to keep its passengers safe in the future.
No, they won’t go back right away, which is why cruise companies are bracing for no revenue through the remainder of 2020. However, unless I’m missing something from the protests taking place by people opposed to the stay-at-home restrictions placed upon them, there is a segment of the population who won’t have a problem taking a cruise soon.
The Bottom Line on Royal Caribbean
There is no question Royal Caribbean’s stock is not for the faint of heart.
However, history had shown that aggressive investors who piled into its stock in 2008 and early 2009, when it dropped from $43 to less than $6 (86% decline) in 14 months, were handsomely rewarded.
I believe the same thing is going to happen to those who run into the fire when everyone else is running out.
“CEO Richard Fain is a seasoned veteran who’s been through plenty of threats to its livelihood. He’s always brought the company through to the other side healthier than ever,” I wrote on April 14. “I have 100% confidence he’ll do it again. And when he does, you can be sure RCL stock will be trading over $100.”
Is there a possibility that Royal Caribbean will go bankrupt? You better believe it. However, for those willing to take immense risks, the rewards will be equal.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
