What happened
For the second day in a row, cruise line files are full speed ahead and racing for the open sea.
A better-than-expected revenue report came out yesterday Royal Caribbean (NYSE: RCL) jumped a rally across the cruise line sector. The momentum wears off this afternoon, with Royal Caribbean shares still gaining 12.3% through 12:15 p.m. EDT, Carnival Corporation (NYSE: CCL) lagging only slightly with a gain of 3.6%, and Norwegian Cruise Line Holdings (NASDAQ: NCLH) up a solid 6%.
Image Source: Getty Images.
So what
And yet, at the same time as individual investors seem to be becoming more optimistic about cruise stocks, the professionals are becoming conservative. In today’s news, two of Wall Street’s biggest names cut their price targets on Royal Caribbean.
Saying Royal Caribbean has “broad” access to capital and is likely to begin at least a “gradual” return to service before the end of the year, reports TheFly.com, investment bank Stifel Nicolaus maintains its buying options on shares of Royal Caribbean. Stifel further notes (according to StreetInsider.com) that it hopes to see a COVID-19 vaccine begin distribution in the first quarter of 2021, which could accelerate a recovery. Nevertheless, the analyst has reduced its price target from $ 85 a share to just $ 72 a share.
Investment megabanks JPMorgan also cuts its price target on the stock, from $ 72 to just $ 67. Contrary to Stifel’s optimism, JP warns that the recovery of the cruise sector may be slower than previously predicted – causing Royal Caribbean shares in particular less valuable than the analyst previously thought.
Well what
Indeed, JPMorgan believes that Royal Caribbean Stock will outperform the market, and continues to recommend the stock for this reason. But there seems to be reason for caution here, as even these price target cuts imply optimistic analysts.
Already in the past two weeks, two of the three main publicly traded cruise lines have been seen warning that they are being burned by cash at rates higher than previously expected. Norwegian Cruise Line Holdings now burns $ 160 million a month, and Royal Caribbean anywhere from $ 250 million to $ 290 million. Seeing the trend I would not be surprised if even Carnival reports accelerate cash burn in their next update.
Even assuming “generous” liquidity, burning more cash in the middle of a recession is not a good thing. Not to put a too good point on it, but it is a reason for these stocks to trade, not up.
