Fundamentally, you don’t need to look far for reasons to stay away from Royal Caribbean Cruises (NYSE:RCL). Even in the best of circumstances, cruise ships are giant floating Petri dishes. With cramped conditions combined with the presence of food, beverages and a sense of jovialness, it doesn’t take much to get sick. And that’s precisely why RCL stock sank from its highs following the outbreak of the novel coronavirus.
At the same time, there’s an inherent risk in beating a dead horse too often. As happens more frequently than people care to admit, when too many folks bet on the same outcome, it begs the opposite result. Moreover, with RCL stock, some striking evidence suggests that the underlying industry is due for a robust recovery.
That was clear last Friday when rival Carnival (NYSE:CCL) popped up nearly 11%. According to the company’s business update, “cumulative advanced bookings for the full year of 2021 capacity currently available for sale remain within historical ranges at prices that are down in the low to mid-single digits range, on a comparable basis, including the negative yield impact of FCCs [future cruise credits] and onboard credits applied.”
If so, this is a strong indicator that consumer sentiment is steadily returning, aligning well with an increase in airline passenger volume since its April lows. Additionally, Royal Caribbean generated its own headlines, buying up the remaining shares of Silversea Cruises that it didn’t already own.
True, Royal bought the remaining stake via 5.2 million shares of RCL to save cash. However, the bigger narrative was that the company was interested in making any acquisitions at all. Essentially, it put its money where its mouth was.
Be Wary of the Longer-Term Outlook for RCL Stock
Beyond the travel industry, cruise line contrarians have another catalyst to bank on – the improving economy. In another stunning display, the June jobs report revealed that total nonfarm payroll employment rose by 4.8 million. Again, this beat expectations, just like the prior May jobs report did.
Better yet, the unemployment rate dropped to 11.1%. Naturally, the Trump administration bragged about the data, which in its view is confirmation that the economy is bouncing back. Obviously, if this trend sustains, it would provide a much-needed lifeline for the President.
At this juncture, the economy is Trump’s major “accomplishment.” Losing that would be detrimental – though perhaps not untenable – to his chances for reelection.
However, so many holes exist in this bullish argument that I’m not sure where to begin. First, the data doesn’t account for states pausing or rolling back their reopening initiatives due to resurgent coronavirus cases. Second, we’re talking about dead-cat bounces from a cataclysmic drop; of course, the percentages look great from this skewed context.
But one of the biggest economic hurdles is the rise of permanent job losses. In June, this metric increased to 2.825 million. This puts us on par with levels last seen in May 2014. And that’s not good news for RCL stock.
Currently, the positive job reports we’ve witnessed give a false sense of security. As weekly initial jobless claims demonstrate, millions are still filing for unemployment benefits. This indicates that pain is spreading toward white-collar workers, who have been insulated from the first round of layoffs due to remote work capabilities.
But what happens when remote work is no longer an option? With various industries suffering revenue losses, further layoffs will occur. This headwind will dry up consumer dollars, eventually hurting RCL.
Get Ready for More Pink Slips
No matter what the cruise industry does, it can’t survive in its current condition without the consumer. You can’t workshop your way to profitability and growth. Either the consumer base wants to go on vacation, or they don’t.
Now, the argument is that Carnival’s advanced bookings apparently haven’t fallen off a cliff. Thus, it’s reasonable to assume the same for Royal Caribbean. Adding to this thesis is that RCL has admittedly been steadily moving higher since its March and April lows.
However, with the personal saving rate at extremely elevated levels, the broader consumer discretionary market has necessarily deflated. And I’m also certain that it will get worse because most companies can’t keep paying full salaries for their lazy, entitled American workers while suffering an unprecedented demand loss.
Put another way, if your job can be done outside the office, it can be done outside the country. Unless the paradigm reverses quickly, we’ll likely see hiring managers get this bright idea in their heads.
Ironically, as I mention this outsourcing threat, millions are protesting for social justice and equality. Thanks to the coronavirus, we’ll get that equality – an equality in poverty. I’m pretty sure that’s not conducive for Royal Caribbean.
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.
