Shares in Royal Caribbean Cruises (NYSE:RCL) are shaking off the hit they took last week. Royal Caribbean and other cruise stocks were collateral damage when Norwegian Cruise Line Holdings (NYSE:NCLH) warned of possible bankruptcy. That announcement shaved over 13% off RCL stock over two days.
While the shock over the Norwegian situation appears to have worn off, the reality is the situation remains grim for Royal Caribbean. And it’s not likely to get a whole lot better until a vaccine is found for the novel coronavirus.
Norwegian’s Warning Causes Rough Seas for RCL
On May 5, Norwegian made an announcement that immediately resulted in a sell-off of cruise stocks. Burning through cash with its ships docked, Norwegian warned it lacked the funds to meet financial obligations for the next year. Unless it was able to obtain financing, the company could be forced to begin bankruptcy proceedings.
Given that cruise lines — which are incorporated offshore to avoid paying U.S. taxes — were left out of the coronavirus stimulus package, the warning seemed especially dire.
The impact was immediate. Within hours, Norwegian stock was down 22%, Carnival Corp (NYSE:CCL) dropped 9% and RCL stock took a 10% hit. The next day, Norwegian announced that it had secured $2.2 billion through a mix of stock and debt. That’s enough to keep it afloat for over a year without paying passengers.
Despite the save, cruise line stocks didn’t begin to bounce back until May 7. By that point, Norwegian’s situation knocked 13% off Royal Caribbean.
The Challenge for Cruise Lines
Finding the financing to stay afloat for the short term is one thing, but if cruise ships remain in port for an extended period the survival of the industry is in question. And the reality of the situation is that cruise ships are just about the worst place to be to avoid coronavirus.
In March, Dr. Abdu Sharkawy, an associate professor at the University of Toronto and infectious disease specialist with the University Health Network, pointed out in a CBC interview:
“Cruise ships really provide a fairly unique situation because you take a large group of people and you confine them to a rather limited space.”
“If I had a cruise booked, I would frankly cancel it. You just don’t have that degree of control, you don’t have that amount of flexibility when you’re stuck on a vessel with 3,000, or 4,000, or more, other passengers and you’re kind at the mercy of the local authorities.”
Social epidemiologist and York University professor Mathieu Poirier has concerns about the ability of cruise ships to manage the health of passengers.
“The people that we’re relying on to make these cruises safe … aren’t getting paid enough to do the work that needs to be done in a meaningful way. Until that gets taken care of, I think we’re going to see a continuation of what we’ve seen in the last few decades: a lot of these infectious diseases spreading and them not being controlled quickly or effective enough.”
In other words, until there’s a proven vaccine for the coronavirus, safety onboard these ships will remain a big question. It’s unlikely Royal Caribbean and other cruise lines will be able to resume operations.
The Bottom Line on RCL Stock
If Royal Caribbean’s ship start cruising once again, then the current price of RCL stock will seem like a bargain. After all, it’s currently trading at less than a third of what it was going for in January.
However, the cruise industry stands little chance of getting those cabins full until an effective vaccine is developed for the coronavirus. That’s something a host of pharmaceutical companies are intensely focused on doing, including Inovio (NASDAQ:INO) which began human trials in April.
Despite repeated downgrades of RCL as this crisis has unfolded, most investment analysts are still betting that vaccine will be found, and passengers will once again embrace cruising. Among those surveyed by CNN Money, RCL stock has a consensus buy rating with a $62 price target.
When making your investment decision, don’t focus purely on financing. Norwegian proved finding the cash to stay afloat is possible — even without government assistance. Instead, keep a close eye on the race to develop a coronavirus vaccine. That effort is going to make or break the future of cruise lines, including Royal Caribbean.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.