Alongside all cruise line stocks, Royal Caribbean (NYSE:RCL) stock was on a tear from mid-March to early June, with RCL stock rising nearly 300% during that stretch on optimism that the company’s cruise line operations would shake off the novel coronavirus pandemic and rebound strongly in 2021 and 2022.
That recovery rally in RCL stock has since hit some turbulence.
From its early June highs, Royal Caribbean shares dropped nearly 30% on concerns of a second wave of Covid-19.
Specifically, with Covid-19 cases and hospitalizations rising in various states, Wall Street has grown worried about this second wave derailing the current economic recovery, scaring consumers back inside again, forcing another global lock-down and ultimately killing what has been a huge comeback rally in cruise line, airline, hotel and travel stocks.
None of this is going to happen. So buy the dip in RCL stock. From current levels, this stock has another 50%+ upside potential over the next 18 months as the global economy and consumer behavior normalize.
Here’s why.
Second Wave Fears Are Overstated
Second wave Covid-19 fears are overstated for two very important reasons.
First, while the number of confirmed coronavirus cases in the U.S. is rising, the number of confirmed coronavirus deaths is not rising. Instead, as the number of daily new cases in the U.S. has risen over the past few weeks from a daily rate of ~20,000 to ~30,000, the number of daily new deaths in the U.S. has steadily dropped from ~1,000 to ~400.
Sure, some of this can be attributed to the fact that deaths should lag cases. But we also aren’t seeing a rise in hospital resource use nationally, and there shouldn’t be any lag there. The positive test rate also continues to trend down.
Broadly, then, the data implies that this rise in cases is either driven by an increase in testing capacity or by non-severe cases. Either way, it’s not a “worrisome” uptick in cases.
So long as we don’t see a significant rise in deaths or hospital resource use nationally, we won’t see see legislators roll back reopening measures. That’s because the social and economic costs of a shutdown have proven to be quite large (and no one really wants to go back to that world unless absolutely necessary).
Consumers Remain Resilient
Second, consumers are much less scared of the virus today than they were back in March.
Case-in-point: while Covid-19 cases rose steadily in June, so has consumer mobility, restaurant and store foot traffic, and consumer search interest in all things travel related.
In other words, there’s so much pent-up demand from consumers to do things, that it’ll take a lot more than a rise in cases to scare consumers back inside. As is the case on the legislative front, you’ll need a sharp rise in both deaths and hospital resource use before consumers go back to where they were in March and April.
Big picture: I’m not saying a second wave isn’t coming. It is. It’s arguably already here. But I am saying that consumers and businesses alike are learning how to keep the world turning while concurrently managing down Covid-19 risks.
Both parties will get better at this balancing act over the next few quarters. As they do, overall economic activity will continue to rise, even in the face of a second wave.
That’s great news for RCL stock.
RCL Stock has 50%+ Upside Potential
RCL stock has dropped 30% on second wave fears. Now, the cruise line stock will rebound 50%+ as those fears abate and business recovers over the next 12 to 18 months.
My base case on Royal Caribbean is simple.
Fiscal 2020 bookings, revenues and profit margins all collapse. All three rebound meaningfully in 2021 as cruises start operating again. Bookings and revenues almost fully recover in 2022 – the first full-year after a vaccine – while margins rebound to steady-state levels below prior peak levels due to heavier spend on cleaning.
The math is equally simple.
Fiscal 2019 revenues were around $11 billion. Fiscal 2022 revenues recover to roughly $10.5 billion. Operating margins in 2019 were about 19%. They rebound to 15% in 2022. Assuming so, my modeling suggests $6 in 2022 earnings per share is doable.
Based on a historically-average 13-times forward earnings multiple, that implies a 2021 price target for RCL stock of $78.
That’s up about 50% from where shares currently trade.
Bottom Line on RCL Stock
Cruise line stocks went from ice cold, to red hot, back to ice cold. I’d take advantage of this recent sell-off, and buy the dip in both RCL stock and all other cruise line stocks. The idea is that second wave Covid-19 fears are overstated, and that the economy and consumer behavior will increasingly normalize over the next three to 18 months.
Alongside that normalization, RCL stock could rally 50% higher.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
