We have to face facts — Royal Caribbean Cruises (NYSE:RCL) may not recover until there is a Covid-19 vaccine. RCL stock may tread water until the prospect of mass dosing of the vaccine is real.
This is despite the fact that Royal Caribbean recently said it will begin operations on Sept. 15. For example, if you want to cruise from Fort Lauderdale to the Bahamas you can now reserve a date starting on Sept. 24.
As it stands, the CDC “No Sail” order, which was last updated on April 15, lasts for 100 days, or until July 24. However, there is nothing to prevent the CDC from updating and extending that order. For example, if the CDC decided to extend the order again on July 1, no cruise line could sail until mid-September.
So, you can see my point. If the CDC extends the order anytime after July 1, the 100-day quarantine will last after the time when Royal Caribbean plans to restart U.S. cruise operations.
Why a Vaccine Matters So Much
Despite what the company plans, I think they recognize the likelihood that operations will not restart, at least in a major way, until 2021 sometime.
For example, the company announced on June 9, that it had raised another $2.15 billion in senior guaranteed notes and convertible notes. On May 19, the company raised $3.3 billion. At that time, it estimated total liquidity was $3.15 billion.
Since the company’s estimated cash burn is $250 million to $275 million, I estimate that by the end of June its total liquidity will be about $4.8 billion to $5 billion.
So that means the company could burn its cash for at least 12 to 16 months after June 30. I believe that means the company is preparing for the absolute worst-case situation.
They know that for practical purposes, the traveling public may not take to the seas without a vaccine for Covid-19. And the vaccine must be readily available. That means it must be in production with sufficient doses to cover all those who want it.
Without that assurance, the likelihood of the company’s revenues picking up to the point where it is no longer burning cash is low.
What Analysts Are Saying About RCL Stock
Seeking Alpha recently reported that Barclays issued a report that “cools on cruise line stocks as recovery stocks.” They recommend lodging and gaming stocks since they have better “risk/reward” traits than cruise line stocks.
Seeking Alpha’s poll of 18 analysts have an average estimate of negative $12.56 per share for 2020. There are 21 analysts who estimate that 2021 EPS for RCL stock will be negative 90 cents. Similarly, Yahoo! Finance has polled 17 analysts who believe 2020 earnings per share will be negative $13.10, and negative $2.52 for 2021.
So you can see that the company does not have any positive earnings expectations for at least the next 18 months. That may not necessarily mean the company won’t be cash-flow positive by the end of that period. But, I think, this could also be another reason why Royal Caribbean raised so much debt recently.
What to Do With RCL Stock
I recently wrote an article on Carnival (NYSE:CCL) with a similar theme: “Carnival Stock Won’t Recover Until It Gets a Firm Sail Date.” Carnival’s situation is direr since it is burning $650 million a year.
Just like Royal Caribbean, Carnival has been raising debt to enhance its liquidity. I firmly believe that both managements believe that the No Sail order may be extended well beyond mid-September.
And even if it expires, they implicitly know the traveling public won’t feel secure until a vaccine is readily available.
The problem is RCL stock still does not reflect this dire forecast. It will tread water or even hit its prior lows until there is a sufficiently clear forecast on a vaccine. The patient investor will look for an opportunity to take advantage of this situation when the price falls further.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
