Carnival Cruise (NYSE: CCL) and Royal Caribbean (NYSE: RCL) experienced extreme turbulence over the past few months. Especially, as the short term future of international travel dims. It seems the cruise line industry, as mentioned by Buffet, will never be the same again. Since our last article on investing in CCL and RCL, both stock prices have risen 5-10%, respectively. Investors are showing long term interest in the cruise line industry. However, the long term implications are still unknown. So let’s go through those implications and determine whether or not RCL and CCL still hold value.
CCL and RCL’s grim future?
Nobody knows when the economic defibrillator will bring the cruise line industry back to life. While the future is uncertain, what is certain is that the outlook is negative. CCL and RCL have come to a screeching halt. Cruise lines companies are in limbo-land. CCL and RCL’s unattractive future is broken into three parts
- A prolonged period before RCL and CCL return to business as usual.
- A sharp downward trend in financials over the next 2-3 years.
- A probable recession/depression could cause RCL and CCL to file for bankruptcy.
1) When will RCL and CCL return to business as usual?
If you think after COVID-19 fizzles out you might want to think further. Let’s go through some scenarios.
- Coronavirus fades, no recession, economy recovers = tourism/borders are the last phase of recovery
- Coronavirus fades, recession, economy recovers = tourism/borders are the last phase of recovery
Either way, RCL and CCL are frozen for some time.
Carnival is taking reservations. However, CCL is unsure when they will sell tickets again. Thus, there is no substantial evidence to predict when CCL will even open their doors again, let alone get back to business as usual.
Carnival Cruises are using voyages and airplanes to get their crew home. John Hell, senior cruise director, announced that COVID-19 is causing the Carnival fleet to be down to only 3,000 crew members. Ultimately, screaming a lack of business confidence considering CCL had 29,000 crew members in March. Moreover, with the current travel restrictions, imagine how long it is going to take CCL to get the remaining crew members home.
Royal Caribbean currently filed its face mask (‘seaface’) to the US patent and trademark office. RCL expects to use the facemask for isolation purposes. If trademarked, it could be beneficial for the entire industry.
- P/E ratio 4.35 = suggesting negative outlook.
- How long can they survive financially? = Until the end of 2020
- $3.6 billion in cash
- Debt: $12 billion+
- How long can they survive financially? 6-12 months.
- Earnings report 6th May.
3) Economic decline – recession or depression
An economic recession, either during or after COVID-19, would cripple the cruise line industry. People would not be focusing on travel. Consequently, RCL and CCL would receive no revenue and passengers. RCL and CCL’s employees would likely leave as they need any paying job to get through tough times. Essentially, RCL and CCL would be burning cash for the same duration as the recession. Leaving the cruise ship giants down the path of voluntary administration, if not bankruptcy.
Are Cruise ships a viable investment?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Carnival is trading at a 72% discount because investors lack confidence in the business. Honestly, I do not blame them. Because, if no-one can travel due to COVID-19, which we don’t know when will end, and CCL is still servicing $1billion in expenses each month, where is the upside? Nowhere.
To add insult to injury, CCL will unlikely to receive a bailout. Because most of CCL cruises are registered outside the US (tax reasons) and employ foreign workers (cheaper). Thus, there is no incentive for the U.S government.
Moreover, the longer COVID-19 stretches, the probability of the whole industry collapsing increases. Leaving, many investors, speculating a CCL recovery, badly burned.
However, governments are starting to purchase debt off large businesses (‘junk bonds’). This unorthodox bailout method could be the defibrillator that revives CCL. Thus, I would not invest in CCL for the long or short term until there is substantial evidence to support a recovery.
RCL’s massive cash-debt imbalance is concerning. Because RCL will burn out eventually. Thus, with a prolonged coronavirus-crash in store, we should see RCL’s financials deteriorate.
Like, CCL, RCL is not a US company. In turn, the chance that the US federal reserve purchases RCL’s Junk bonds are very slim. Thus, without government support, mountains of debt, and a forecasted recession, I would not invest in RCL.
Overall, I prefer CCL over RCL. However, the future is personally too uncertain (risky) for me to invest in either.
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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 Patrick McLoughlin, and Tyger Fitzpatrick, Senior Manager, and Founder of YIG.