Insights

Why Cruise Line Stocks Rebounded Today

What happened

Happy days are here again for cruise line stock investors — but will they last?

After suffering four straight days of declines, shares of Carnival (NYSE: CCL) (NYSE: CUK) rebounded sharply this morning, rising 2.2% through 10 a.m. ET. Royal Caribbean (NYSE: RCL) investors soon joined in the fun, booking a 2.7% gain, as did Norwegian Cruise Line Holdings (NYSE: NCLH) — up 3.2%.

So what

Cruise stock fans are pointing to a new survey out from Cruiseline.com that shows 91.4% of respondents saying they plan to take a cruise “within the next year,” and 34% saying they will cruise within just the next two to four months. The results led the website to opine that “travelers are feeling comfortable in cruising once again and are taking the next steps of researching and booking upcoming voyages.”  

And yes, that sounds like good news for cruise lines, but beware. Because the bad news could still be coming.

Sometime later today, the Federal Reserve will reveal whether or not it will hike interest rates by 0.75% or by 1% this month. If the latter, cruise companies can expect to incur another $730 million in annual interest costs on their debts, which approach $74 billion already. But even in the former, more benevolent, scenario, cruise companies still have to expect to incur an extra $550 million in interest costs on their debt.

That’s not good news.

And tomorrow, the Bureau of Economic Analysis releases its latest economic readout, which will probably confirm that the U.S. economy is already in recession — its second straight quarter of negative GDP growth. Absent a miracle, that confirmation holds the potential to spook not just investors, but cruise lines’ customers as well.

Now what

Last but not least, while Carnival has already delivered its bad financial news for this quarter, Royal Caribbean and Norwegian Cruise have not — yet. Royal Caribbean is due to report its fiscal second-quarter results on Aug. 2, followed shortly by Norwegian Cruise reporting on Aug. 4.

At last report, analysts were still expecting both companies to report losses (of $2.20 per share and $0.86 per share, respectively), but to soften the blow by forecasting a return to profitability in the third quarter. The problem is, these same analysts had the same expectation of Carnival a month ago, and that hope fell flat.  

Given the potential for Royal Caribbean and Norwegian Cruise to similarly disappoint next week, I continue to believe that investors are best advised to sit tight for now, and save their buying until after all the bad news has happened and been incorporated into these companies’ share prices.

Dive into cruise stocks if you must. But before you do, make sure you know exactly how many sharks are swimming in these waters — and how big they are.

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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