The cruise industry has been one of the least performing sectors in the past year, but major cruise liners have gained handsomely. For example, shares of Royal Caribbean Cruises (NYSE:RCL) are up more than 32% in the past six months, despite its ships being docked since March 2020. Cruise ship operators are riding a wave of optimism amidst the approval and dissemination of the Covid 19 vaccine. However, it’s clear with RCL stock and its peers that the markets have gotten ahead of themselves.
RCL and its peers have had incredibly tough in shoring up their finances. Despite their best efforts, they were unable to get the support of the government. Therefore, they have had no choice but to bear to burn cash and raise capital to control the bleeding. For example, RCL’s one-year debt to growth rate has surged over 745%, with its 5-year average at just 37%. Despite these challenges, RCL stock trades at more than eight times forward sales. The stock is uninvestable at current levels, especially with the dreary outlook of the sector. Let’s dig in a little deeper to have a clearer understanding of what’s going on.
Return To Normalcy
The cruise-ship industry had been lobbying hard to set sail in July, but the CDC has quashed those hopes. The Framework for Conditional Sailing Order (CSO) which the CDC issued in October last year, will remain in effect until Nov. 1, 2021. It first banned cruises in US waters back in March 2020. After extensive lobbying, the no-sail order was removed on October 30, replacing it with a conditional sail order.
Even if cruise operators begin sailing in the third or fourth quarter this year, it will be on a dramatically limited scale. It’s tough to imagine how their fleets could be pressed into service on an immediate basis. They will have to devise safety protocols that need to be met by health officials and passengers.
Additionally, there are also going to be capacity constraints in the updated schedule, which means that every ship’s full revenue will be limited. It will be imperative to assess which combination works the best in maximizing revenues, meeting safety needs, and customer satisfaction. It will continue to weigh down their business for the foreseeable future.
RCL’s Recent Activities
RCL recently released its fourth-quarter and full-year financial results for the past year. It reported a US GAAP net loss of $5.8 billion last year when it reported a net income of $1.9 billion in 2019. Additionally, it burns an estimated $250 million to $290 million per month with the suspension of operations.
The company stated that it had already begun limited operations. For instance, its Quantum of Seas cruise ship began operating in Singapore. Additionally, it also plans to develop a detailed plan in meeting the CSO for sailing in the US. However, several uncertainties remain with regards to the timing, cost, and other specifics.
Perhaps the most encouraging thing is that its bookings for the first half of next year are in line with historical levels. Moreover, customers have no issues with the higher price points. Though it’s unclear when it would return at a full schedule, when it does, it will get the ball rolling in an emphatic fashion.
Final Word on RCL Stock
It’s tough to get excited about any cruise liner at this time, let alone an overvalued one in RCL. With the uncertainty surrounding its external environment and its debt burden, it’s tough to see how it’s trading at pre-pandemic levels. RCL has a high margin business, and its management has led its operations impeccably over the past several years. Additionally, bookings are looking impressive so far for the coming year. Then again, the situation with the pandemic is still developing, and the stock is trading at significantly high levels.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
