Norwegian Cruise Line (NYSE:NCLH) CEO Frank Del Rio just delivered some terrible news about 2021 bookings. While the industry has been relatively upbeat about future business, it turns out that all of them might have been blowing smoke about the timing of a potential turnaround.
If you own shares of NCLH, Del Rio’s candid admission means your marginal cost of holding its stock just got a whole lot higher.
Is it worth it to hang in there? I’ll look at both sides of the argument.
Hold on to Your Norwegian Cruise Line Stock
The embattled CEO appeared on CNBC on Sept. 22, confessing that 2021 bookings aren’t as good as industry representatives have been letting on.
“We’re behind last year. There’s no question, but not as far behind as you would think given what’s been going on,” Del Rio said. “Pricing has held up well. No one is discounting the product, rightfully so. And so we’re hopeful that 2021 can be an OK year. It won’t be a record year by any means, but it certainly won’t be the disaster that 2020 has been.”
There are two types of NCLH shareholders at this moment. Those who’ve owned the stock since the beginning of the year — they’re down 74% through Sept. 23. And those who bought at March lows between $7 and $8 — they’re up 102% at the midpoint.
How you view what Del Rio said depends on which camp you’re in.
If you’re the former, you’ve likely started to realize that Norwegian’s not going to dig itself out of trouble anytime soon. That means you’re probably sitting on dead money for at least six months, maybe longer.
If you’re the latter, you might be tempted to take your profits because the easy money has already been gotten. The next leg up will require a vaccine sure-thing or some other major catalyst to get it moving. After all, since the end of June, NCLH stock has stuck to a relatively tight range between $15 and $20. You might be able to squeak out a couple more bucks of profit before the end of the year — but at what cost?
That said, once potential cruising customers see enough safety precautions in place, 2021 bookings could accelerate. Remember, Americans still have a decent amount of cabin fever. If Norwegian, Royal Caribbean (NYSE:RCL), and Carnival (NYSE:CCL) can deliver a program that’s ironclad safe, I have no doubt more consumers will pull the trigger on a cruise.
Royal Caribbean CEO Richard Fain recently discussed the 60-page report it, along with NCLH, submitted to the Centers for Disease Control and Prevention (CDC):
A key part of it is to create a bubble, where we test every single person going on board, the guests and the crew and protect them so that their likelihood of entering with coronavirus is very low. And then we have processes on boards, so that if somehow somebody slips through, there’s still protection so it doesn’t spread. We look forward to working with the CDC.
At the end of the day, although 2021 bookings are down from previous years, they’re much better than expected. Three months ago, I’m not sure cruising consumers were ready to take a leap of faith. Comments by Del Rio and Fain suggest that things are starting to change.
Dump It Fast!
I live in Canada. While we haven’t been perfect containing the novel coronavirus, we’ve done a much better job than America. That’s a fact.
However, Covid-19 is not the kind of virus you become overconfident about, because it will crush you if you let it. Canadian Prime Minister Justin Trudeau addressed the Canadian people Sept. 23 and gave a frank assessment of where the country’s at with the virus.
“In our four biggest provinces, the second wave isn’t just starting, it’s already underway,” said Trudeau, of the current outbreaks in British Columbia, Alberta, Ontario and Quebec. “We’re on the brink of a fall that could be much worse than the spring.”
Where I live in Nova Scotia, the case numbers are almost non-existent. However, nationwide, the number of daily cases has jumped from 300 in mid-August to 1,248 today. That’s four-fold growth in a single month.
“Together, we have the power to get this second wave under control,” the PM said. “This is the time for all of us as Canadians, to do our part for our country, as government does its part for you.”
Sounding a little Kennedy-esque, Trudeau is right. We have the power to keep Covid-19 at bay, but only if we all do our part.
In the U.S., the deaths from the virus have shot through 200,000. Meanwhile, the number of daily cases in the past week has risen by 20% to more than 43,300, almost 35 times higher than the rate in Canada.
Using conventional wisdom — America’s population is approximately 10 times Canada’s — the daily rate of infection should be closer to 12,480.
All of what I’ve said isn’t to knock America. It’s to point out that 2021 sailings aren’t a slam dunk, despite all of the precautions cruise lines are taking to get people back on board and out to sea.
The Bottom Line
The last article I’ve written about any cruise line was in early August. At the time, I argued that Carnival’s stock had gotten much cheaper and was starting to look like a bargain. It’s ticked up a little in the two months since, but not by much.
Now, as the election draws nearer, and Americans get more obstinate about whose side they’re on — Trump vs. Biden — the odds of the country taming Covid-19 in 2020 appear slim to none.
Who knows what happens in 2021. What I do know is that a second wave is not the time to be risking your capital on cruise line stocks given how far they’ve come since the March correction.
Ultimately, I remain confident in the long-term potential of the cruise industry. However, until Covid-19 settles down, I have to pull any buy recommendations I’ve made in recent months. The risks are too high.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.