What happened
It’s Monday, and things seem to be taking a turn for the better for cruise line shares. In the early afternoon trading, shares of Royal Caribbean (NYSE: RCL) lead the cruise sector higher, up 10.9% from 12:30 a.m. EDT after reporting revenue this morning.
Rivals Carnival (NYSE: CCL) en Norwegian Cruise Line Holdings (NASDAQ: NCLH) follow the pack, 7.7% and 8.6%, respectively. But if you ask me, it all started with Royal Caribbean.
Image Source: Getty Images.
So what
Today is earnings day for Royal Caribbean, and unlike rival Norwegian Cruise Line last week, Royal Caribbean appears to be hitting revenue.
Analysts had expected Royal Caribbean to lose a pro forma $ 4.82 per share loss for its fiscal Q2, and with cruise delays, it forecast revenue of just $ 43.5 million. Royal Caribbean’s loss actually came in larger than expected: $ 6.13 per share per forma, and its GAAP loss was even worse at $ 7.83 per share. However, Royal Caribbean’s revenue was slightly better than forecast at $ 175.6 million, and investors today seem to be concentrating on that bright note.
Well what
However, should investors be so optimistic?
Royal Caribbean correctly reported the coronavirus pandemic, which forced the cancellation of all its second-quarter sails, both for the sharp decline in revenue and for the enormous GAAP loss. “The COVID-19 pandemic poses an unusual challenge to our sector and society,” said CEO Richard Fain. And despite the reaction of investors to today’s income news, the challenge may become more serious, not less.
The last we heard was Royal Caribbean targeting a cash burn rate of $ 250 million to $ 275 million per month while its ships are restricted to port. In the current report, the company said that its monthly cash burn is now averaging anywhere from $ 250 million to $ 290 million. So, just like we saw last week with Norwegian Cruise Line, cash-burning rates seem to be running higher, and management efforts are fighting to ride their army.
According to Royal Caribbean’s statement that it “has about $ 4.1 billion, all in the form of cash and cash equivalents”, even a burn rate of $ 290 million per month implies that it is still more than a year cash in the kitty has to fund it through the tail end of this recession. But if burn rates continue to rise beyond what was planned, this could clearly be a risk to keep an eye on – for shareholders in Royal Caribbean, and for investors in the other cruise stocks.
