Are Royal Caribbean and Carnival Cruises a viable long term investment?

The global shutdown of the transportation and tourism industry has lead to some of the biggest Cruise lines across the globe halting operations until further notice. Subsequently, these Cruise line giants have lost almost 2/3 of their share value since February. Royal Caribbean (NYSE: RCL) and Carnival Corporation (NYSE: CCL) both share a market cap north of $5 billion, marking them the biggest contenders in the US. Now before we break down the fundamentals of both companies, you must remember we are currently in a health crisis NOT a financial crisis. On top of this, both companies hold a substantial amount of systematic risk in the current market environment (short term). Now this risk reaps reward however use caution in your best interest.

Here is the risk you are taking on when buying.

  • Both Cruise Lines may not be protected by the US Government – although listed on the NYSE, both companies are incorporated off-shore. Royal Caribbean (RCL) is incorporated in Liberia and Carnival Corp (CCL) is incorporated in Panama. This means that both companies do not pay US federal income tax meaning the $2 Trillion stimulus package will not divide to either company. We will discuss both companies solution to bolstering liquidity later in the article.
  • Customer Behaviour – this point is a lot more self explanatory. It will take consumers some time to feel safe travelling again especially on a cruise ship. With money tightening on all ends, consumers may not consider travelling on a cruise for a few years until things really settle.
  • Bad Quarterly Results and No Dividend? – as we are entering an uncharted territory, it would be naive to say you know what will happen over the next 6 months. Depending on how long it takes for fast effective testing and containment of the first wave – will determine the performance of these cruise ship quarterly results. Now being realistic, I can’t see either CCL or RCL posting a quarterly dividend for at least the next two quarters – as of course you need profit to pay dividends in the first place.
  • High volumes of Option puts placed on Carnival Corp according to Nasdaq – This does show that traders are expecting a big movement in CCL prices by April 17. Although not a genuine sign of a red flag, it does give insight into how option traders are swayed at the moment.

With all that risk, how big is the reward?

Now after a speil on risk, you will probably want to see the potential reward. The good news is that both companies are operators of incredible scale. It’s going to take more than just a 6 month ban on operations to take down such mammoth corporations. In fact, Wedbush analyst, James Hardiman states that after calculating a monthly cash burn of approx. $500 million a month, alongside a fresh cash injection – will give Carnival approx. 12-13 months of survival. This gives Carnival enough time to restructure their priorities and get back up and running once COVID-19 settles. Here are some pros that come with investing in either CCL or RCL.

  • Debt may just save them – Royal Caribbean (RCL) released a statement on Monday confirming they had secured a $2.2 Billion loan to fortify their liquidity. Carnival also drew a $3 billion credit line on it’s bank credits while also securing another $3 billion on first priority claim bonds. However, both companies are already stacked with debt, which is raising some eyebrows of cautious investors. If you are willing to take on the debt as a shareholder, it may mean sacrificing a few dividend payments however may produce a nice capital gain in the long run.
  • We are looking at 52 week Range spreads of mass proportion – Royal Caribbean (NYSE: RCL) currently has a 52w spread of $19.25 – $135.32. In comparison to Carnival Corporation (NYSE: CCL) with $7.90 – $56.04. Both companies have fallen at a similar rate meaning it doesn’t matter which stock you picked, in theory they have the same growth potential in % terms. Ofcourse, talking in theory is naive and it will depend on which company is fittest to survive (higher % gain future).
  • IF the virus is less profound, it could be a goldmine – the return on such an investment if successful would prove a great long term position. My current position based off my research is to watch the movements of these stocks over the next two weeks. I am looking at an entry price for Carnival Corp under $5.90 and an entry of $18.50 or below for Royal Caribbean (personal strategy from evaluation). At these prices I am better able to mitigate some of the risks mentioned above.

Last thing I’d say is right now, the pros and cons do equate with each other. What matters now is what type of investor you are. If you like taking on risk for high yields like me, finding a sweet entry point will be the difference between you making double or triple your money. However, if the crisis continues to worsen it becomes harder to see the cruise liner industry surviving a 2-3 year long haul or recession.

Recent News on RCL and CCL

  • RCL Executives take pay cuts
  • RCL has extended suspension on itinerary movements
  • April 17 Put $2.50 on CCL “had some of the highest implied volatility of all equity options today.”
  • Carnival Corp (CCL) shed light on a new $1.250 Billion share offering on common stocks and another $1.750 Billion into convertible notes – lender gets equity within the company instead of loan + principle which is a normal company bond.

I will be updating this news feed everyday so our subscribers and readers are up to date on the latest with RCL and CCL. Subscribe below for email updates when we post, our team is working around the clock to provide our readers with a deeper understanding of the stock market.

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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

Written by Tyger Fitzpatrick, Founder of YIG.

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