Insights

Why Cruise Line Stocks Are Sailing Slower Today

What happened

Cruise line stocks got off to a slow start Monday, retreating modestly in late morning trading despite no particularly bad news having come out (yet).

As of 11:25 a.m. ET, shares of Carnival Corporation (NYSE: CCL) (NYSE: CUK) are down 2.5% and Norwegian Cruise Line Holdings (NYSE: NCLH) has slipped 2%. Royal Caribbean (NYSE: RCL) is least worse off today, suffering only a 1.6% loss.

So what

But why are cruise stocks falling at all today, in the absence of bad news? The answer, I fear, is that while bad news has not surfaced yet, it may be lurking just over the horizon — and investors are right to be cautious today.

What should investors be on the lookout for this week? First and foremost, on Wednesday, the Federal Reserve will announce its next hike in interest rates. As I pointed out last week, the three big cruise lines are carrying a combined nearly $74 billion in debt. Thus, if the Fed raises interest rates by only the 0.75% that most investors now anticipate, it will add about $550 million in annual interest costs that Carnival, Royal Caribbean, and Norwegian Cruise will have to pay. And there’s still the possibility the Fed might decide to raise interest rates by a full percentage point — in which case, you can expect interest costs of cruise company debt to rise by more than $730 million.

Next up: economic data. One day after the interest rate hike comes out, the Bureau of Economic Analysis will report how badly the economy performed in the second quarter. Analysts suspect the data will show a second straight quarter of contraction, which — if it happens — will confirm that the U.S. economy is officially in recession. That’s probably not going to be good news for stocks in general, or cruise stocks in particular.  

Now what

And even then, the bad news may not be over. As this week turns into next week, two of the three cruise companies named above, Royal Caribbean and Norwegian Cruise, are due to report their second-quarter earnings results (on Aug. 2, and Aug. 4, respectively).

Wall Street is predicting that both companies will report losses for the quarter, but analysts still forecast that things will turn around in the third quarter, and both companies will become profitable next quarter. Analysts made the same prediction for Carnival Corporation last month — and were dead wrong, resulting in Carnival losing more than 10% in market cap since earnings came out.

If Royal Caribbean and Norwegian Cruise are forced to similarly disabuse analysts of their optimism next week, it’s likely those two stocks will fall as well. Investors who are stepping to the sidelines today, and modestly selling off Royal Caribbean and Norwegian Cruise shares ahead of earnings, are probably plotting a prudent course.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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