There’s No Smooth Sailing For Royal Caribbean

It's hard to see the upside for RCL stock as long as cruise ships remain in the harbor

The most featured player in the pandemic saga was the cruise ship industry. Royal Caribbean Cruises (NYSE:RCL) stock faced the brunt of the fallout and lost more than 60% of its stock value year to date.

RCL Stock: There's No Smooth Sailing For Royal Caribbean
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With cruise plans canceled this summer and no cure for the virus in sight, cruise lines find themselves floating in the deep red.

Cruise stocks took another hard hit on June 23, confirming investors’ bearish sentiments. RCL stock fell 10% in a single day.

The downfall comes after a lack of clarity on when cruise ships will set sail again. Given the current numbers, the prospects for this industry are not too encouraging.

Cruise Plans Canceled This Summer

The news of the pandemic outbreak served as a death knell for major cruise lines and with good reason. The cruise ship business model is essentially a “floating coronavirus trap” as it involves having large groups of people in close proximity in the middle of the ocean.

However, in the initial phase of the pandemic, the situation was not too grim for cruise companies who had billions of dollars in reserves to keep them afloat. Many customers who had trips planned for the summer opted for a credit refund instead of canceling their plans altogether.

But things have gone downhill since then. In the past few weeks, as states begin reopening its economies after the shutdown, the same cannot be said for companies like Royal Caribbean and Carnival (NYSE:CCL) whose ships remain harbored. Earlier this month, the Cruise Line International Association stated that no ships will set sail until mid-September.

This is dire news for industry, which will be forced to keep its doors shut during the peak tourist season. But what adds fuel to this fire is the unpredictable character of the virus. Major cruise companies had set target reopening dates between April and June that never came to fruition. Only time will tell if cruise lines can actually open its doors in September.

But even if ships do set sail in September, it is likely that demand for cruises would have dried up. Diehard cruise-goers may have run out of patience and people may still be in fear of catching the virus in the second wave of the pandemic. Investors should steer clear of Royal Caribbean stock until the company is able to recoup its losses and sail the high seas again.

RCL Stock Gets A Bad Rap

With no light at the end of the tunnel for cruise companies, credit agencies are looking to downgrade cruise stocks. On June 24, Carnival was downgraded to a junk grade status by the S&P 500 Global Ratings. Norwegian Cruise Line Holdings (NYSE:NCLH) and Royal Caribbean stock are expected to follow suit.

The future of cruise companies like RCL hangs in the air and Barclays analyst, Felicia Hendrix sees no potential for growth in the near future. This comes from the lack of clarity on the reopening of the cruise line and the rising debt levels that push its financials deeper into the red. The analyst lowered RCL’s price target from $55 to $50.

Although Royal Caribbean raised millions of dollars in cash to tide it over for the next few months, it is still a long way from last year’s profitability levels. This is a huge red flag for the company as the end of the pandemic is nowhere in sight. If the sailing restrictions go well past September, Royal Caribbean may find itself in some deep waters.

Rough Sailing Ahead

States around the U.S are seeing spikes in the coronavirus cases and governors are urging people to stay at home. With the reversal of re-openings in some states, it is abundantly clear that the pandemic is not going away any time soon.

The target date for cruise lines to open its doors is not set in stone and it is likely that this deadline could be pushed back. As cash reserves remain stable, investors may be tempted to buy into Royal Caribbean stock that seems to be on the road to recovery. However, the fundamentals of this investment point to a different truth.

With a weak balance sheet riddled with debt and low levels of profitability, RCL is unlikely to make a comeback any time soon. This is in addition to a looming global recession and an increase in the number of coronavirus cases. If investors decide to buy RCL stock, they may be sailing into unchartered territory.

As of this writing, Divya Premkumar did not own any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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