Royal Caribbean (NYSE:RCL) stock may have doubled off its lows, but that doesn’t mean it’s smooth sailing to recovery. As seen from the cruise operator’s shares pulling back 28% in the past month, investors are assessing what’s next.
On one hand, cruise ships sailing out of the U.S. remain mothballed until at least Sept. 15. With additional months of cash burn ahead, Royal Caribbean isn’t out of the woods just yet.
On the other hand, RCL stock may actually be the strongest cruise-line play out there. You would think that the largest player in the space, Carnival (NYSE:CCL), would take this title. Yet, other factors may give this operator greater odds of a rapid comeback.
That alone may not be enough reason to buy shares today, as they hang around $50 per share. With investors chomping at the bit to bet on a recovery, shares have moved up too fast, too soon. Even after cooling down from their early June prices (around $75 per share).
Like what we’ve seen with airline stocks, it’s hard to guess how quickly cruise lines will fare as the novel coronavirus enters the rearview mirror. But, while there is opportunity for shares to bounce back to pre-pandemic levels (above $100 per share), it may be worthwhile to wait for another pullback before entering a position.
What Lies Ahead for RCL Stock
The factors that will drive a rapid rebound for Royal Caribbean are largely out of its control, though the company is doing what it can to improve the situation.
How so? Putting together a panel of experts, the company and its smaller rival, Norwegian Cruise Line Holdings (NYSE:NCLH), are fine-tuning their safety protocols so that travelers can have piece of mind before setting sail again. Even as the pandemic doesn’t appear to be slowing down in the U.S.
Granted, this alone won’t ensure demand returns when the time comes to resume operations. But, investors may see it as a sign that the industry is fast adapting to the “new normal.” By putting together a plan of action, they can get themselves back on the road to profitability.
Or can they? With the high fixed-costs of operating cruises, safety measures like reduced capacity may make profitability a challenge. This is assuming operations can resume come September. What happens if the industry again voluntarily delays reopening?
The risk of even more potential cash burn may mean today’s share price doesn’t reflect all risks. Yet, for those looking to wager on a cruise-line comeback, this may be your best option.
Which Cruise Line Stock Is the Better Buy?
With multiple cruise-line stocks out there, investors have many options to bet on a comeback. But which one offers the best risk/return proposition?
Forget about valuation metrics. With operations idle, earnings multiples don’t mean much in today’s environment. Liquidity is the more important metric. Choosing a cruise-line play hinges a lot on finding the one that can ride out the choppy waters the longest.
As InvestorPlace’s Chris Tyler wrote July 6, Royal Caribbean has likely raised enough funds to stay afloat well into 2021. This is in line with the liquidity situation over at its largest rival, Carnival.
Both look matched in terms of liquidity. What other metrics can we consider? Carnival has much larger market share. One could assume this size and scale would give them the edge.
Yet, that may not be the case. As this Motley Fool commentator recently noted, Royal Caribbean’s target market is experienced cruise travelers. Pent-up demand from cruise aficionados may help them quickly rebound once ships set sail again.
Are first time customers Carnival’s bread and butter? Not so much. In short, this cruise line operator may have a better shot of “returning to normal” sooner than its larger peer.
Wait For a Pullback Before Buying RCL Stock
So, what’s the verdict with Royal Caribbean? Things may be stuck in neutral right now. The industry is taking action to ensure its cruise ships are safe post-pandemic, but it remains to be seen when ships can set sail again.
With this in mind, buying today, as so much uncertainty continues to linger, doesn’t look like a shrewd move. A lot of the rebound upside remains priced into shares.
But, on an additional pullback, RCL stock may be a worthwhile bottom-fisher’s buy. Consider shares if they dip lower from here.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.