Cruise line stocks have been among the worst impacted due to the novel coronavirus pandemic. It’s expected that international tourist numbers will fall by 60% to 80% this year. This sharp decline is likely to cost the global tourism industry at least $1.2 trillion.
Without doubt, the impact will be felt across the sub-sectors of the tourism industry. Prior to the crisis, cruising was the fastest growing sector in the travel industry with an increase in demand by 20.5% in the last five years.
The black swan event has put breaks on the growth momentum. However, the cruising sector is likely to see strong revival once the virus is contained. This makes cruise line stocks worth accumulating.
An April 2020 report stated that 76% of people who cancelled cruises in 2020 have chosen to accept credit towards cruises in the next year. A recent survey also indicated a promising outlook for cruise travel for the coming year.
Given this outlook, the following cruise line stocks can deliver healthy returns in the next few quarters.
Cruise Line Stocks to Buy: Royal Caribbean Group (RCL)
After touching lows of $19.25 in March, RCL stock has been in an uptrend. I believe that the positive momentum is likely to sustain.
With survival in focus, the company reported cash and equivalents of $4.1 billion as of June. Recently, the company also secured commitment for short-term loan facility of $700 million. With this liquidity, the company is positioned to navigate challenging quarters.
A positive point from the company’s second quarter result for 2020 is that “the booked position for 2021 is trending well and is within historical ranges.” The company already has $1.8 billion in customer deposits for bookings.
Another positive is that the company has $11.3 billion in committed credit facilities that are available for ship deliveries through 2025. With $1.5 billion in capital expenditure commitments through the next year, the company is fully financed.
The company has also roped in former Food and Drug Administration Commissioner Scott Gottlieb. He will be “serving as co-chair of a group called the Healthy Sail Panel.” These initiatives should instill confidence among travelers.
Overall, RCL stock is attractive even after a sharp upside from March lows. A positive development on the vaccine front is likely to serve as another potential catalyst in the coming year.
Carnival (CCL)
CCL stock has been relatively sideways in the last few months. However, in the last one month, the stock moved higher by 17%. I believe an uptrend is imminent.
Recently, the company announced that AIDA Cruises will offer cruises this fall and winter in Europe. While AIDA has cancelled long-distance cruises, this might just be the beginning of better times as short-distance cruise services resume.
At the same time, it’s important to note that a “U-Shape” industry recovery is likely. The company believes that the fleet will return to Q2 2020 capacity level in 2022. Even with the gradual recovery, the oversold stock is likely to trend higher.
From a liquidity perspective, the company ended the second quarter with a total liquidity buffer of $7.6 billion. The company has a monthly cash burn rate of $650 million. Therefore, I don’t see any liquidity stress even if coming quarters remain sluggish in terms of bookings. In addition, the company has $8.8 billion in committed facilities for ship deliveries through 2023.
Overall, CCL stock is attractive with the company will positioned to survive an extended period of downturn. However, gradual exposure to the stock is advisable instead of a big plunge.
Norwegian Cruise Line (NCLH)
In terms of returns, NCLH stock has been an underperformer in the last one year as compared to RCL stock and CCL stock. However, I do believe that there is value in the stock and some exposure can be considered.
The silver lining for the company is that the cumulative booked position and pricing for the next year are within historical ranges.
Therefore, with a total liquidity position of $2.5 billion, the company is well-positioned to see through the next few quarters. Currently, the company has a monthly cash burn of $160 million. The liquidity position ensures more than one year of survival without any revenue.
In addition, I expect the cash burn to potentially decline in the next few quarters with initiatives such as pay reduction, extended furloughs and deferral of capital investments. This will help in preserving liquidity and keeping leverage under control.
In the last financial year, the company generated $1.8 billion in operating cash flows. Further, the company’s OCF have averaged $1.8 billion in the last three financial years. Clearly, there is no doubt on the business delivering value. Investors need to hold the stock patiently for healthy returns beyond the current headwind.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
