What’s next for Royal Caribbean (NYSE:RCL)? RCL stock has rebounded off last month’s lows as investors bet on a recovery post-novel coronavirus. Things may not be so dire for other hard-hit industries. But, for the cruise line industry, it’s a long road to recovery.
Sure, you can make the argument that cruise ships aren’t toast. Once the pandemic subsides, cruise ships could make a comeback, as millions getting “cabin fever” right now decide to take long-overdue vacations.
But this is assuming operations will resume within a few months. That’s the current projection, but with multiple stakeholders mulling when it’s safe to “return to normal,” there are no guarantees.
When shares were at their bottom (below $20 per share), perhaps taking a long-shot bet on Royal Caribbean stock was worth the risk. But now, with investors bidding shares back to above $35 per share, the stock looks like less of a compelling proposition.
In short, RCL stock doesn’t look like a screaming buy. Considering you can buy other beaten-down travel stocks like airlines and hotels at low valuations, taking chances with cruise line stocks seems like an unnecessary gamble.
Things May Not Be So Bad for RCL Stock
With no revenue coming in, high fixed costs, and heavy debt on their balance sheet, Royal Caribbean looks like a bankruptcy waiting to happen.
However, analysts at Stifel believe things may not be so bad. They’ve given shares a “buy” rating, and a price target of $48 per share.
Their rationale? According to them, Royal Caribbean is in good shape in terms of liquidity. Based on their numbers, the cruise line has enough funding to stay afloat for around ten months. By tapping into available financing, and slashing expenses, the company has given itself a bit of wiggle room.
Yet, this doesn’t mean they don’t need to raise more capital. The company is in talks to raise an additional $500 million. The question for investors is whether this will be dilutive for RCL.
Analysts over at Wells Fargo believe future financing will include some convertible bonds, as well as a private equity placement. In other words, chances are the cruise line will have to give up some of its equity to seal a deal.
Is this good or bad for current shareholders? Based on what Investorplace’s Ian Bezek discussed on April 16, don’t expect smooth sailing in terms of raising more funds.
Discussing RCL stock, Bezek pointed out how larger, financially stronger rival Carnival (NYSE:CCL) had to pay a pretty penny to raise capital. Not only in terms of high interest in newly-issued debt, but also in handing over equity at fire-sale prices.
Why Royal Caribbean Could B a Sinking Ship
Despite its woes, RCL stock appears priced for a turnaround. With shares up more than 90% from their late-March lows, stock market investors may assume the company’s risks have diminished. Yet, from the eyes of bond investors, the opposite is happening.
This Seeking Alpha contributor recently broke down the situation. Action in the bond markets points to bad news for the cruise line. Royal Caribbean’s bond prices have cratered. The cost for investors to ensure their bonds against default has skyrocketed. Based on his calculations, the underlying equity may be worthless.
Granted, this is a highly bearish view of RCL stock. The author of the article has sold shares short. Yet, it isn’t a stretch to assume shares could fall further, as the company’s financial health deteriorates.
Royal Caribbean may be able to raise capital. This may dilute current shareholders, but it could prevent the stock from falling to zero. On the other hand, this doesn’t mean shares will rally once its financial woes are resolved. With this in mind, airline and hotel stocks may be better ways to bet on a travel industry recovery.
Cruises Will Keep on Sailing—Just Don’t Expect RCL Stock to Recover
Cruise ships aren’t going anywhere. Despite the recent troubles, many people are still looking to get back on the high seas once the pandemic subsides. Based on reports from Carnival, bookings for 2021 are up from 2019 levels.
Yet, this doesn’t make RCL stock a great investment opportunity. Things remain more uncertain for cruise lines than they do for other parts of the travel economy With more solid rebound opportunities out there, stay away from this and other cruise line stocks.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
