If there were one sector ripe for contrarians right now, it’s the cruise industry. The impact of coronavirus on the sector is unclear, though most are expecting it to be brutal. That’s bad news for companies like Carnival (NYSE:CCL), whose business depends on renewed demand from cruisers once the travel bans have been lifted. CCL stock is down more than 70% from its February highs, but can it claw any of those gains back?
While the broader market has recovered somewhat from the March stock market crash, Carnival and its peers have continued to suffer. That’s because uncertainty looms over the future of the industry — will people be too afraid to travel? Will they have enough money? What will happen if a second wave of coronavirus outbreaks emerges in the Autumn?
CCL Stock Is the Best of the Worst
When it comes to investing in the cruising space investors essentially have one of three choices— Carnival or its peers, Royal Caribbean (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH). Of those three options, CCL stock is the best choice.
That’s because Carnival has the most chance of surviving without having to file for bankruptcy. The company recently raised $2.5 billion, which should keep it afloat in the near-term as it waits for travel restrictions to loosen.
So, if you think the cruise industry can bounce back alongside the rest of the economy, CCL stock could be a good play. However, it’s worth considering that the novel coronavirus could completely reshape the industry— perhaps ending cruising as we know it forever.
Can Cruising Survive?
Earlier this week, the markets were buzzing with news that since opening up its latest cursing dates, Carnival bookings were on the rise. A Cruise Planners employee told TMZ they’d seen Carnival’s cruise bookings increase by 600% over the course of just three days. Many pointed to the report as evidence that people still have an appetite to cruise— that they’re going to be quick to forget the ugly reports of getting stuck, and in some cases dying, abroad.
But Carnival itself has made no mention of this 600% increase, and even if the tabloid report is somewhat true, a huge increase like that is meaningless without some context. If only one person had booked a cruise during the three days before, a 600% increase would be just seven new bookings.
Rebooking a Possibility
Carnival CEO Arnold Donald announced a series of layoffs, furloughs, and reduced salaries in order to shore up the firm’s finances ahead of what’s destined to be a tough month. The stock made its way lower on the news, but there was a nugget of hope mixed with the gloomy message.
Donald said that less than 40% of customers have asked for a refund, suggesting they may be keen to rebook. If that’s the case, we can be almost certain that cruising as we know it isn’t dead yet.
But consider this possibility — perhaps a large proportion of those people haven’t had time to rebook. There are also many who don’t understand how or didn’t know it was possible. And what about those who haven’t been able to get through to process their refunds.
There’s a chance Carnival is buffering its cash coffers because it’s expecting a sudden wave of refund requests.
The Bottom Line on CCL Stock
There’s a chance cruising will rebound, and if that scenario plays out CCL stock will be an absolute winner. But I believe there’s a much larger chance that demand for cruises will all-but evaporate even when travel restrictions have lifted.
Even if there is some demand, Carnival is going to struggle to make use of it. The ships will have to endure rigorous health-and-safety measures to ensure no one becomes sick onboard. While passengers seem to be willing to forget the episodes that transpired at the height of the pandemic, another Covid-19 outbreak would be a public relations nightmare.
Carnival will need to employ more people and spend to protect passengers — but where is it going to come up with all of that money.
If Carnival does survive coronavirus, I think there will be plenty of time to buy before CCL stock recovers. Cruise operators have a long road ahead and even if they can manage to convince people to come aboard, profitability is likely years away.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
