I’ll be among the first to acknowledge that taking a cruise right now seems like an awful and gross idea. But that doesn’t make me any less bullish about the long-term potential of Royal Caribbean (NYSE:RCL) stock.
In fact, I think RCL, even its dramatic rise over the last three months, is still a huge potential winner for long-term investors.
You just have to be willing to wait until there’s a vaccine for the novel coronavirus before you can start thinking about cashing in. And thankfully, that vaccine is getting closer every day.
The Dramatic Rise of Royal Caribbean
Royal Caribbean stock really didn’t have anywhere to go after it bottomed out in March. And for the year, Royal Caribbean shares are still down roughly 55%.
Remember, there was no government bailout for cruise companies like the airline industry enjoyed. RCL and its peers, Carnival (NYSE:CCL) and Norwegian Cruise Line Holdings (NYSE:NCLH) had to find their own way through the crisis as ships were forced to remain in port and the stock prices plummeted.
RCL stock bottomed out in late March, but has been generally on the upswing ever since. Royal Caribbean stock is up 21% in the last month, and rose by a whopping 75% in the last three months.
And it still has a long way to go. Royal Caribbean is at $60 now, but was trading at double that price earlier this year. I believe that given time, Royal Caribbean stock will get back to those highs.
The Bull Case for RCL Stock
While people are squeamish about cruise lines right now, the reality is that cruises are super-popular, particularly with the Generation X audience. According to the Cruise Lines International Association, the number of passengers taking global cruises increased from 17.8 million in 2009 to a projected 30 million in 2019.
Currently, cruise lines are docked until at least Oct. 31, but that’s not stopped people from booking their vacations next year. Royal Caribbean CEO Richard Fain said the company is seeing strong interest in 2021 bookings.
“I think we are seeing that there’s a pent-up demand. People are frustrated being at home and being isolated,” he told CNBC. “I don’t think that’s a surprise.”
Speaking to industry analysts, Fain said that more than 60% of bookings the company has for 2021 are new reservations, rather than those being rescheduled from cancelled 2020 vacations.
“We have been both humbled and surprised with the amount of bookings we’re seeing for 2021 with literally no marketing efforts. And frankly, very little good news. But the tone of our bookings, especially as we get into the second half of 2021, has been encouraging. Our guests want to come back… Families want and need to vacation.”
The company hopes to resume operations in China and Australia before the end of October. I’m optimistic that cruises in Europe can resume before the end of the year, and U.S.-based cruises can resume in the first quarter of 2021.
The outlook was positive for Credit Suisse analyst Benjamin Chaiken, who said 2021 bookings and the company’s cost-cutting efforts are positive developments. He gave Royal Caribbean stock an “outperform” rating and set a price target for $75.
Royal Caribbean Shouldn’t Have Liquidity Problems
RCL posted second-quarter earnings that included revenues of $175.6 million, a decline of 93.7% from a year ago. That’s not a shock.
Adjusted losses per share were $6.13, which is worse than the $4.71-per-share loss that analysts had expected. The company said it anticipates burning between $250 million and $290 million per month. It had $4.1 billion of cash and cash equivalents on hand as of June 30.
Last week, Royal Caribbean added to its liquidity by securing another $700 million loan facility from Morgan Stanley. RCL can withdraw the money, if needed, any time before Aug. 12, 2021.
The company continued to withhold guidance for the rest of the year, which is understandable. But the reality is that revenues will continue to be depressed as long as ships are out of the water.
Royal Caribbean Doubles Down
As my InvestorPlace colleague Will Ashworth reported in July, RCL isn’t shying away from the cruise industry. In fact, it recently acquired the remaining 33% of Silversea Cruises, the luxury cruise line, that it didn’t already own.
The all-stock deal cost 5.2 million shares of outstanding Royal Caribbean stock, and completes an acquisition that begin in June 2018.
I love this deal because it shows that Royal Caribbean knows that people will be cruising again when Covid-19 isn’t as big as a threat. There’s plenty of money to be made in the business and now is a good time to grab a piece of the business – as RCL did with Silversea – when the market is depressed.
The Bottom Line
When I wrote about RLCL stock in June, shares were about where they are now – at the $60 level. In that article, I predicted that Royal Caribbean stock will continue to be choppy, but long-term investors could expect a doubling of their money.
I still believe that’s the case. I bought RCL earlier this year and so far have seen a 105% profit. I’m expecting another 100% climb to $120 per share by the end of 2021.
Don’t be afraid to ride out the choppiness. Royal Caribbean stock is strong buy.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he is long RCL stock.