Ever since the novel coronavirus began sending unemployment figures into almost comical record heights, observers have commented about a severe disconnect between Wall Street valuations and the tears of Main Street. Perhaps few industries reflect this discordant reality than cruise ship operators. Take Royal Caribbean Cruises (NYSE:RCL) as an example, where RCL stock has more than doubled off its March lows.
It’s not just Royal Caribbean. Rivals such as Carnival (NYSE:CCL) and Norwegian Cruise Line (NYSE:NCLH) have likewise jumped from the doldrums. Furthermore, this bullish narrative isn’t entirely without justification. After having been quarantined at home for months in many cases, millions of Americans are apparently ready to reclaim their lives.
Primarily, Memorial Day weekend drew big crowds. Additionally, Las Vegas began the process of reopening to much fanfare. Visitors and locals flocked to the casinos, many ignoring mitigation protocols such as wearing masks and social distancing. While this presents broader health concerns, for the hospitality and travel industries, this is the evidence they were desperately seeking.
Basically, consumers want to get out of the house, spend their money, and not give a rat’s hind end about the coronavirus. It’s a trifecta that’s almost too perfect for RCL stock and its ilk.
Adding to the enthusiasm, American Airlines (NASDAQ:AAL) boldly declared that they will aggressively add back flights in July. Following suit was rival United Airlines (NASDAQ:UAL), announcing intentions to resume 130 nonstop routes in July that were suspended during the crisis.
Obviously, this has direct implications for RCL stock as it suggests consumers are willing to travel despite infection threats. But if you’re thinking about gambling on the cruise liners, I would caution against it.
RCL Stock Is Sailing on a False Narrative
At the end of the day, the investment market represents a forward indicator. Fundamentally, valuations reflect what investors believe a particular asset is worth based on assumptions. Now, you can derive these assumptions based on an endless array of quantitative and/or qualitative factors.
But at the end of the day, they’re still assumptions. And with RCL stock, I believe the bulls are assuming aggressively and without much justification.
First, let me address the optimism regarding the airliners. Until we see substantive improvement in travel data, it’s incredibly risky to take the industry’s word on their projections. That’s akin to believing anything a used car salesperson has to say. Talk to me when people aggressively put their butts on those seats.
Second, I’d take consumers’ willingness to travel – such as Memorial Day crowds or packed Vegas casinos – with a grain of salt. Even the Cleveland Browns will attract fans on opening day. Whether they do so in the middle of a 2-14 season is the real question.
Here, I anticipate that the nationwide protests calling for social equality and justice will dent this early enthusiasm over time. Naturally, people will want to protect their homes should the situation get out of hand. But more critically, coronavirus infections can spread significantly considering that we’ve currently “bottomed” at about 20,000 new daily cases.
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Third and most importantly, I highly doubt that the economic backdrop supports vacationing to any significant degree. Let’s remind ourselves that since the government kept records of initial jobless claims, this number never exceeded 700,000 before the Covid-19 pandemic.
If you’re interested, the pre-pandemic record was 695,000 claims in October 1982.
Since the current crisis started, nearly 43 million Americans filed for unemployment benefits. Vacationing is the last thing on their minds.
Royal Caribbean Is Disconnected from Itself
By now, you really should think twice about gambling on RCL stock. But if you’re still on the fence, you should look at what Royal Caribbean is doing and not what they’re saying.
According to a Bloomberg report, the company “sold $1 billion of bonds on Thursday [June 4], the cruise liner’s second outing in the credit market in less than a month as its seeks to boost liquidity while the coronavirus keeps ships at port.”
Typically, it’s not a great sign when you have to go into debt just to save yourself. Additionally, Royal has been burning “about $250 million to $275 million of cash per month,” according to management. The gamble here is that now, the cruise ship operator can stay afloat until at least mid-2021. By then, consumer demand should pick up.
I don’t think I’m alone when I say I’m skeptical. At least with the airliners, they serve both personal and business needs. With cruise ships, it’s all discretionary. With an already shoddy reputation that got horrifically worse with the coronavirus, it’s best to avoid RCL stock for now.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
