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Choppy Seas Lie Ahead for Royal Caribbean

The novel coronavirus shut down the operations of cruise operators, including Royal Caribbean Cruises (NYSE:RCL). As a result, their shares have fallen hard. Year-to-date, RCL stock is down about 73%.

RCL Stock: Choppy Seas Lie Ahead for Royal Caribbean
Source: Laszlo Halasi / Shutterstock.com

Many shareholders are possibly still hopeful that the current cruise ban will likely end in the coming weeks. So, is this a good time to buy into the shares of the business?

Royal Caribbean is expected to file its quarterly results by the end of May. If you are not yet an investor in RCL stock, you may want to study the metrics to be announced at the time. Let’s see why.

Royal Caribbean and the Pandemic

The group controls and operates four cruise brands: Royal Caribbean International, Celebrity Cruises, Azamara and Silversea Cruises. It is also a 50% joint venture owner of the German brand TUI Cruises and a 49% shareholder of the Spanish brand Pullmantur Cruceros.

As the severity of the global pandemic became clear in the first quarter of the year, all cruise operators including Royal Caribbean suspended operations as early as mid-March. We do not yet know when it may set sail again and under what conditions.

It has also taken various measures to maintain solvency, which is a challenge during the pandemic for many corporations. The business is working on additional secured lending capacity and various debt deferrals.

The monthly cash burn, which includes “ongoing ship operating expenses, administrative expenses, and debt service expense, hedging costs, expected necessary capital expenditures” is between $250 million to $275 million. How many companies can continue to exist with that kind of financial obligation but no revenues?

A recent U.S. Securities and Exchange Commission filing by the cruise operator highlights the many questions the company is facing. The company said in the filing:

“In addition to the imposed restrictions affecting our business, the extent, duration, and magnitude of the COVID-19 pandemic’s effect on the economy and consumer demand for cruising and travel is still rapidly fluctuating and difficult to predict. As such, these impacts may persist for an extended period of time or even become more pronounced, even after we are permitted to and/or begin to resume operations.”

The company is not alone in not knowing when traveling may resume in 2020. Unless there is an effective vaccine soon, the whole industry may have to change in ways we would not have envisioned in January,

RCL Stock at a Glance

In mid-May 2015, Royal Caribbean’s stock price was around $75, and shares hit an all-time high this January, reaching $135.32. But today, RCL stock is about $35.

The stock’s compound annual growth rate over the last five years has been about -14%. Put another way, $1,000 invested in RCL stock would have decreased to approximately $470.

Investors who bought the shares would have lost considerable capital over the past five years. But in fact, the stock’s  steep losses occurred in 2020. Thus, if we had done a similar calculation in early January 2020, the results would have looked a lot different.

Please note that Royal Caribbean is still paying a quarterly dividend and thanks to the sagging stock price, the yield is 8.6%. The calculation above doesn’t take into consideration its dividends or reinvesting that income. I did not factor in any brokerage commissions or taxes, either.

However, given the grave uncertainty the industry is facing, management may well join the ranks of scores of companies that have recently suspended dividends. For example, its peer Carnival (NYSE:CCL) recently axed the dividend and suspended buybacks of its stock.

In case of a potential dividend cut, RCL stock would likely suffer further.

Can RCL Stock Recover Soon?

Over the past decade many analysts have concurred that cruising would become the fastest growth segment in a growing vacation industry.

According to a recent industry report, “The cruise industry … has steadily been growing, even during the economic recession in the 2000s. Between 2009 and 2019, the number of cruise tourists worldwide rose significantly from 17.8 million passengers in 2009 to an expected 30 million in 2019.”

What a difference a few months can make. According to the International Monetary Fund (IMF), the global economy will contract 3% in 2020. Yet in 2021, the IMF forecasts robust growth. Stock prices generally reflect expectations of future profits.

Investors who agree that these gray clouds may dissipate in the coming months may want to start investing in cruise stocks.

However, many countries are still facing lockdowns as well as travel restrictions. Thus, the light at the end of the tunnel for the industry may still be far away. For example, Tui Group regards this as the greatest crisis the industry ever faced. And as a result, it is “targeting to permanently reduce [its] overhead cost base by 30 percent across the entire Group. This will have an impact on potentially 8,000 roles globally that will either not be recruited or reduced.”

Tui Group and Royal Caribbean are partners in Tui Cruises. Needless to say, Tui management’s words will resonate with RCL stock owners.

When Royal Caribbean reports earnings in a few weeks, the Street may get a better view as to when the group will generate revenues again. I would also pay attention to additional steps the beleaguered cruise operator may be taking to improve its liquidity and whether it’s pursuing any additional financing arrangements.

The Bottom Line on RCL Stock

Given limited visibility for cruise operators as well as the wider travel industry, I’d not yet be willing to commit any new capital into cruise stock including RCL.

On March 18, Carnival stock price hit a multi-year low of $19.25. Could it be that the Street is having doubts about the ability of the cruise operator to survive?

Yet each portfolio is different. Depending on your own risk/return profile, if you believe Royal Caribbean may be able to negotiate the extremely choppy waters in the coming months, then you may consider initiating a small position. Growth for cruise operators may indeed resume in 2021 or 2022 if the viral outbreak can be contained in 2020 or if there is a vaccine soon.

I believe our economy is resilient. And in the coming months, we will be able to put at least some of the economic cost of this viral outbreak behind us. But I’d personally consider investing in shares in other sectors that are already proving resilient in the face of the Covid-19 uncertainty.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/choppy-seas-lie-ahead-for-royal-caribbean/.

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