Out of all the industries that have suffered catastrophic losses during the novel coronavirus pandemic, you’d be hard-pressed to find a sector as badly hit as cruise ships. Specifically, Carnival (NYSE:CCL) really took it on the chin. After all, a stricken Diamond Princess cruise liner — under the Carnival umbrella — off the coast of Japan became the face of Covid-19 for several weeks earlier this year. Not surprisingly, CCL stock tanked during this crisis.
But unless you expect the entire industry itself to collapse, contrarians have justification in their bullishness. With CCL stock at rock-bottom levels, and especially after an early June rally failed to achieve sustained gains, investors are arguably more enthused about the opportunity.
Primarily, according to data from the Centers for Disease Control and Prevention, new daily Covid-19 cases have noticeably declined. Back in June, the investment community took solace in encouraging economic data. But a surge in infections caused everyone to rethink their optimism. Unfortunately, CCL stock was one of the victims of this shift back toward a defensive shell.
Now that daily cases have receded and more Americans are taking this pandemic seriously, the likelihood of a sustained market recovery increases. Furthermore, headline economic data provides much encouragement. Most significantly in my opinion, the unemployment rate dropped to 10.2% in July. As more businesses reopen, we could see additional improvement.
Both of these factors bode well for CCL stock, which explains why some investors are backing Carnival. In recent years and especially after the Great Recession, cruise ships offered great value for the money for vacationers. As well, a fading pandemic is critical for this and other industries.
Still, I would remain cautious despite the encouraging developments.
Mass Fear Still Haunts CCL Stock
Although America is slowly creeping back to normal — traffic is steadily rising, kids are returning to school in many areas — this alone isn’t enough reason to blindly buy CCL stock. Yes, some outside fundamentals are encouraging. However, until consumer fears of the coronavirus truly go away, you should be skeptical about consumer transportation-related industries.
You only need to look at the producer price index between travel agency bookings of cruises versus flights: if you do, you’ll quickly realize that one sector is doing markedly better than the other.
In January of this year, the PPI for flight bookings was at 91. In July, it dipped to 88.2, a 3% decline but nothing terribly earth-shattering. Sadly, that’s not the case for cruise ship bookings. This sector’s PPI dropped from 102.1 points to a staggering 53.6 points, a 47.5% loss.
Interestingly, the correlation coefficient between the two metrics from 2011 through 2019 is a negative 53%. You can look at it this way: when people aren’t cruising, they’re flying to their vacation spots. However, since the Great Recession, cruise ship bookings in general have increased while flight bookings have slightly decreased.
Again, this is likely due to the value proposition. Simply, you get more bang for your buck with cruises than you do with flights, which involve other costs like hotels. With cruises, the ship is your hotel.
But this year, cruise and flight bookings share a positive correlation of 55%. In other words, they’re both declining due to the recession, which isn’t surprising. However, when you look at consumer data such as the explosion of e-commerce sales, it’s clear that those with money are spending it.
They’re just not spending it on cruises, which is problematic for CCL stock.
Cruise Passengers Need Reassurances
Another indicator that signals that the middle-class economy (or what’s left of it) is spending robustly is air revenue to miles of freight and mail. According to government data, this metric has skyrocketed this year. People are spending, yes, but they’re going out of their way to make their purchases contactless.
Why? I would argue fear of the coronavirus. Clearly, the coronavirus hasn’t tempered demand for commerce and vacations. How else do you explain surging recreational vehicle sales? As I said, those who have the money are spending it. They’re just not spending it for experiences that could get them sick or worse.
So, I’m not going to buy into the economic recovery argument for CCL stock. Simply, the economy that Carnival and its cruise ship peers — Royal Caribbean Cruises (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH) — have really not benefited.
But the one thing that has changed is fear. Until we have a mechanism to address that, such as mass-scale testing at transportation hubs, or the coronavirus just fades away, Carnival stock will have a credibility problem.
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.