Of all the industries seeking a bailout after the coronavirus hit, cruise lines such as Royal Caribbean (NYSE:RCL) were among the least likely. RCL stock is still reeling from a 70% drop.
They aren’t incorporated in the U.S. Their ships aren’t registered here. They also never saved for this rainy day. Direct aid to the industry is unpopular.
At the end of December, when good times still rolled, Royal Caribbean had $243 million of cash on its books and long-term debt of $8.4 billion.
Yet during that year it paid out $652 million in dividends and bought back another $100 million of its own stock.
While cruise lines didn’t benefit directly from the CARES Act, the Federal Reserve’s actions to open up lending did benefit it. Royal Caribbean quickly moved for $600 million in new financing through Morgan Stanley (NYSE:MS). This helped lead RCL stock to a 45% gain in April.
Conserving Cash and RCL Stock
In addition to direct aid, cruise lines benefit from aid to travel agents and regular destinations such as Alaska.
Investors know that, in regular times, cruise lines are very profitable. Why not wait out the pandemic? In addition to seeking loans, RCL also got old loans on three ships extended during April, plus a moratorium on debt repayments. It laid off about one-quarter of its staff, reducing its cash burn further.
Even before the new $600 million deal became public, Royal Caribbean had gotten a $2.2 billion line of credit from Morgan Stanley. With that, it was said to have $3.6 billion in liquidity to ride out the pandemic, according to Bloomberg.
But it still takes money to keep the company afloat, as much as $100 million each month. That doesn’t include customer deposits that have to be refunded. That doesn’t include the cost of getting 25,000 employees home.
While shares are down 70% so far in 2020, they are now well off their lows of about $21, reached in early March. Bargain hunters have been snapping them up, knowing that if there is light at the end of the tunnel they could rise sharply.
Returning to Service
All this assumes that the industry gets back on its feet.
That may be why Royal Caribbean is now saying it could start sailing again as early as June 11. Even as the pandemic gets worse in the U.S., it is easing up in Europe and East Asia. Royal Caribbean is still advertising cruises to China.
The question then becomes whether customers will return. Cruise ships had some terrible viral breakouts early in the pandemic. They helped spread the virus worldwide in March. Crew members have died of COVID-19.
The U.S. no-sail period ends in July, and RCL rival Carnival Cruise Lines (NYSE:CCL) hopes to get 8 ships back into service by August. But even if the pandemic eases in summer, it could still return in the fall. Royal Caribbean says that when it returns to service, social distancing will be observed.
The Bottom Line on RCL Stock
I personally like cruises. Some of my best memories were made on them. I’ve been on Caribbean tours, European tours, even river tours.
But I’m not going back until there’s a cure or vaccine for COVID-19. The virus is especially deadly with those 65 and over. I turned 65 in January.
That means you’re not investing if you buy Royal Caribbean stock today; you’re speculating. You’re betting that an all-clear is sounded by summer and the pandemic doesn’t come roaring back.
Remember that in any corporate structure the interests of common stockholders come last. If Royal Caribbean is forced to liquidate its lenders will take a haircut, but you will be wiped out.
Don’t buy this stock unless you know you’re gambling.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.