Like its peers, Royal Caribbean (NYSE:RCL) has given back most of its pandemic recovery gains. Falling nearly 54% year-to-date, RCL stock has been hammered by a delayed “return to normal” timeline for cruise lines.
Earlier this year, it was due to the omicron variant. More recently, the shares were hit by concerns that high inflation and a possible recession will prevent the space from making a full recovery. Yet to some, compared to its peers, RCL stock may seem like a better opportunity.
So, among the cruise stocks, is it the best buy?
Perhaps, but it’s questionable whether that means you should buy it at today’s prices. The negatives it has in common with Carnival (NYSE:CCL) and Norwegian Cruise Line (NYSE:NCLH) may outweigh any positives that could give it an edge. The best move for now may be to sit on the sidelines and wait for lower prices.
|RCL||Royal Caribbean Cruises Ltd.||$37.03|
RCL Stock: Several Pros on its Side
If you’re looking to go contrarian on cruise stocks, you may be trying to figure out which of the three major names is the best bet. When it comes to Carnival, it’s easy to rule it out as the top contender. As I recently argued, its debt and dilution issue in particular may signal more pain ahead for CCL stock common shareholders.
That leaves you with NCLH stock and RCL stock. Admittedly, among these two, it’s tough to determine which one is the “best” cruise play. Per Finviz.com, NCLH has received positive analyst ratings, but so too has RCL. According to Susquehanna analyst Christopher Stathoulopoulos, both have the advantage of having less exposure to the European market.
Between the war in Ukraine, and reopening regulations, this may be to their respective benefit. According to this same analyst, both lines are expected to be cash-flow positive starting this summer. I won’t go too much into whether NCLH is a “buy” or not.
But at least on the surface, it’s easy to see why some may prefer Royal Caribbean to Carnival. Though, again, whether that makes the stock a buy today is another question.
Debt Remains Major Concern
Now back to prices not too far above where it sank at the start of the pandemic, RCL stock may seem like a tempting bottom-fisher’s buy. So, if it can sail through what remains of pandemic challenges and ride out the aforementioned emerging challenges? The company could soon swing back to profitability.
Sell-side consensus calls for earnings of $4.79 per share in 2023, and $6.87 per share in 2024. Even if hitting these earnings only resulted in Royal Caribbean making a return to an earnings multiple of 10x-15x, that would mean a big jump from today’s prices.
However, investors interested in RCL should bear in mind that this cruise line operator faces debt and dilution issues similar to those of CCL. In fact, Royal Carribean’s debt-to-equity ratio, at 5.64, is higher than that of Carnival’s 3.38. A large amount of its debt is floating rate debt, meaning a rise in interest rates means a rise in its interest expense.
As its non-floating interest rate debt matures, management will need to refinance it at higher rates. This could curb the likelihood for earnings to bounce back. Even worse, if a recession weights on its recovery timeline, it may too have to sell more shares.
Bottom Line: Watch and Wait for Now
If Royal Caribbean ends up selling more shares to raise cash, this will of course cut into its upside potential. The pie will be cut into many more slices.
This is another factor to keep in mind, before you run out and buy it at around $37 per share, with the expectation it sails back to high double-digit prices. So, given that it faces all of the challenges of Carnival, with a smattering of advantages, should you avoid it completely?
Not necessarily. Risk-hungry investors who aren’t afraid of going contrarian may find opportunity here. Just not at current prices. In lieu of buying now, taking a “wait-and-see” approach may be preferable. As the market is still at work pricing-in higher interest rates, potentially persistent inflation, and a possible recession, RCL stock could re-hit its pandemic-era lows well before it begins making a recovery.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.