All but one of the country’s cruise line stocks drank some water this week. Actions of Carnival, (NYSE: CCL) (NYSE: CUK) and Norwegian Cruise Line (NASDAQ: NCLH) decreased 3% and 7%, respectively. Royal Caribbean (NYSE: RCL) It was the only operator that followed the general market higher, increasing 4% during the week.
It was a challenging week for the industry. There were several analyst downgrades, Carnival sold some ships, Norwegian Cruise Line executed a secondary offering of shares, and the US Centers for Disease Control and Prevention (CDC) again expanded the “Do Not Sail Order” that It will prevent ships from sailing in the United States from traveling anytime soon. Let’s dive into another busy week for the industry.
Image source: Royal Caribbean.
Cruise on a bruise
It was wave after wave of downgrades for cruise line operators this week. Analysts at Macquarie and SunTrust downgraded the ratings on all three stocks. All six movements were accompanied by revised downward price targets.
C. Patrick Scholes of SunTrust feels that investors will grow disenchanted with the shares, which, at the time, had roughly doubled from their pandemic sell-off lows as resumption dates extend. He also sees that the industry’s leading players are likely to raise debt or equity to stay afloat, and that won’t come cheap in a distressed travel market.
JPMorgan lowered its target price at Carnival, but an even bigger dagger came from Chris Woronka at Deutsche Bank. It held firm on its neutral rating at the world’s largest cruise line operator, but it painted a bleak picture of just how weak earnings will be in the future. He sees that Carnival will pay approximately $ 850 million more in interest expense by 2023 than it is now, and along with a higher share count, it will be more difficult for Carnival to reach last year’s maximum return. His model shows that the $ 4.40 per share he reported in net income last year would drop to $ 2.88 per share with all the new debt expenses and the inflated stock count the cruise line had to take to stay alive for the pause.
Carnival told investors late last week that it would cut 13 ships and delay shipyard deliveries to its fleet. This week, it announced that its Holland America line sold four of its ships, prompting even more cancellations on its growing list of rejected trips.
Norwegian Cruise Line was the worst performance of the week of the three actions. It was weighed later in the week after pricing 16.7 million shares in a public offering underwritten at $ 15 a share. It is also priced at $ 1.15 billion in notes.
Cruise lines cannot be blamed for raising money now, and the weather is not as desperate as before in suspension of navigation. Now you get a lot more for your money than three months ago, when stocks were trading at half what they are now. However, these funding moves will make it much more difficult to return to pre-pandemic earnings per share levels.
Finally, the CDC extending the “Do Not Sail Order” until the end of September is not a surprise. The players had already kicked out most of their trips to the fall season.
It wouldn’t be a surprise if it happens again, save for a dramatic recovery from the coronavirus crisis, but there was some positive news on that front. Cruise line stocks rose briefly on promising vaccine news. The industry will have a much easier path to recovery if COVID-19 is not a burning concern.
For now, volatility will continue to play a leading role for stock investors on cruise lines. At the moment, these are not safe stocks, but with all three stocks well away from their highs, the recovery doesn’t have to be perfect. The first signs of a radical change will make investors and speculators excited again.
