The news just keeps getting worse for the cruise line industry. On June 17, Norwegian Cruise Lines Holdings (NASDAQ:NCLH) announced it was canceling all but a handful of cruises that were booked for August and September. Royal Caribbean (NYSE:RCL) and Carnival Cruise Lines (NYSE:CCL) are widely expected to do the same (at the time of this writing, they had not).
Not surprisingly, shares of these stocks are dropping between 5% and 6%. However, in mid-day trading, all of the stocks have bounced off their daily low. And all of the stocks remain well off their March lows. This suggests to me that investors had left room for some bad news. And that is where the opportunity lies. Because a further delay is bad news.
The culprit, as you can imagine, continues to be the novel coronavirus. Specifically that a second wave is beginning to form in states that were the first to re-open. Or is it the extension of the first wave? Or is it due to more testing? At this point, the message is getting even muddier than it already was.
Cruise ships have been stuck in port since March under the Centers for Disease Control and Prevention’s No Sail order. The cruise lines were eagerly awaiting August 1 as a time they could resume sailing, and earning revenue. Now it appears cruise lines, and investors will have to wait until September at least. And this means that cruise lines will not be seeing meaningful revenue until the fourth quarter.
The Math Will Get Worse For Cruise Lines
Results from a recent study on an unnamed cruise ship in March found that over 80% of passengers and crew who tested positive for the novel coronavirus were asymptomatic. While this sounds like devastating news, and it’s unquestionably bad, the real issue is what can the cruise lines learn from the study.
Cruise line stocks have actually done remarkably well since falling off the proverbial cliff. One reason for this is that they didn’t lose all their revenue. Cruise lines offered passengers up to 125% of future cruise credit if they chose to rebook a cancelled cruise rather than receive a refund.
Royal Caribbean has their Cruise With Confidence program that allows passengers to cancel a booking made before August 1, 2020 up to 48 hours before they sail. The credit runs through December 31, 2021 or 12 months from the original sail date. Norwegian and Carnival have similar programs in place.
However, if you assume that these passengers will continue to be patient (and that’s a big assumption) that is revenue that the cruise lines have already realized. That’s a problem. But it’s not necessarily a bigger problem now than it was in March.
A larger concern for me is that by pushing things out until October 1, it would seem the cruise lines are giving themselves no more wiggle room. Many businesses were targeting the end of September as the time that they were “guaranteeing” employment for their displaced employees.
And, cruise lines are still struggling with about 40,000 employees that are stranded on cruise ships. These employees are from countries that are not allowing them to repatriate. They are not getting paid. And some are still testing positive for the virus.
Wait on Cruise Stocks, But Don’t Ignore Them
Everything I’ve written up to now, may contradict my assertion that it’s not crazy to invest in cruise lines. But here is some clarity for investors. The cruise lines are not being held in port because of an outbreak on the ships. This is not a case of passengers being detained on the Diamond Princess. And, contrary to some analogies, this is not the cruise lines moving the goalposts. The goalposts have been moved for them. Cruise lines are simply not being allowed to sail.
And while that means there is no short-term catalyst for cruise line stocks, it doesn’t mean that they’re not worthy of your consideration, just maybe not today.
If anything, cruise lines are getting time to perfect policies that they were hurriedly putting in place. This can help make passengers feel more secure when the cruise lines are allowed to sail.
Cruise Line Stocks Still Contain Risk
I’m not naïve to the risk that still exists for cruise line stocks. But cruise lines have always carried a certain amount of risk. It will be up to every individual passenger to decide whether the risk is worth the benefit.
If, as some medical experts suspect, there is a pronounced second wave of the virus that threatens to overwhelm the health care system, cruise lines could be forced to cancel cruises for the rest of the year. At that point, investors would rightly be concerned about the ability of any cruise line to raise even more liquidity to weather the crisis.
But investors have been living with fear since the pandemic broke out in March. Investing is about managing that risk. And although my opinion of the balance sheets of these companies would change if the no sail order continues, I still believe there will be an appetite for cruising once the opportunity presents itself.
The reason to avoid these stocks is if you believe that these companies are going to enter bankruptcy. That does not seem to be an issue. Otherwise, at some point, there will be a vaccine or proven treatments, and the cruise line industry will return to sailing.
At this point, I would rank the stocks Norwegian first with Royal Caribbean a solid 1A and Carnival after that. With the stocks likely to fall some more, it’s up to every investor to find their entry price and hold on for the ride.
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