Insights

Why Carnival, Norwegian, and Royal Caribbean Are Taking on Water Today

What happened

Shares of cruise ship stocks have that sinking feeling this morning, with Carnival (NYSE: CCL)(NYSE: CUK), Norwegian Cruise Line Holdings (NYSE: NCLH), and Royal Caribbean Cruises (NYSE: RCL) all falling 4% or more at 10:41 a.m. ET on Tuesday.

While there was no specific company or industry news to trigger the rogue wave that is swamping cruise stocks, Walmart yesterday issued a profit warning for its second-quarter and full-year earnings that also said consumers were cutting back on discretionary spending.

So what

The prospect of a second consecutive quarter of gross domestic product contraction — the rule of thumb for what a recession is — suggests consumers are stepping hard on the spending brake, which could lead to fewer people taking cruises.

The cruise industry, though, is seeing robust booking patterns with rates above pre-pandemic levels even though prices are higher. Last month Carnival reported occupancy was rising sequentially as it has 91% of its fleet back in the water, while deposits for future cruises exceed $5 billion.

Royal Caribbean is running at 95% capacity with booking 40% above 2019 and Norwegian is seeing similarly strong numbers, although it admits much of it is because occupancy that typically wouldn’t be available now is. Even so, that shows people want to go on cruises again.

Now what

However, the cruise operators have significantly more debt now than they did before the pandemic and they’re burning a lot of cash to remain afloat. Carnival just completed a share issue at a steep discount to raise $1 billion. The announcement of the stock sale at a price below $10 a share caused shares to tumble hard as investors feared the company may burn through its available cash if it’s not able to stay shipshape on bookings.

Analysts view the move as a proactive one on Carnival’s part, not a defensive one, and following the CDC’s decision to lift its monitoring requirements on the industry, a more relaxed atmosphere may help cruise stocks. 

Still, if the economy continues to deteriorate, cruise line stocks will be in for even rougher seas in the coming months, and there is the risk the recent monkeypox outbreak plunges the industry into chaos again. The World Health Organization recently declared monkeypox a global health crisis.

Both Norwegian Cruise Lines and Royal Caribbean are scheduled to report second-quarter results next week. Analysts are looking for a loss of $0.82 per share for Norwegian, which would be a 57% improvement over the year-ago period, while Royal Caribbean is expected to lose $2.18 per share, which would show similar year-over-year improvement.

Investors will be watching for how much the cruise lines are burning through their available cash. If it’s significantly worse than it’s been (not that anyone is anticipating that at this time) it may mean Norwegian and Royal Caribbean might also have to tap the equity markets to raise more money.

With these stocks already sinking to Davy Jones’ Locker territory in recent months, it could prove devastating.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart Inc. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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