what happened
Cruise ship stocks have that sinking feeling this morning, with Carnival (CCL -5.55%) (DICK -6.00%), Norwegian Cruise Line Holdings (NCLH -4.56%)AND Royal Caribbean Cruises (RCL -5.17%) all down 4% or more at 10:41 a.m. ET Tuesday.
While there was no company- or industry-specific news to trigger the fraudulent wave that is drowning cruise stocks, Walmart yesterday issued a profit warning on second-quarter and full-year earnings, which also said consumers were cutting back on leisure spending.
And what
The prospect of a second straight quarter of contraction in gross domestic product — the rule of thumb for what constitutes a recession — suggests that consumers are stepping on the curb on spending, which could lead to fewer people taking cruises.
However, the cruise industry is seeing strong booking patterns with rates above pre-pandemic levels even as prices are higher. Last month Carnival reported that attendance was rising sequentially as it has 91% of its fleet back on the water, while deposits for future cruises exceed $5 billion.
Royal Caribbean is operating at 95% capacity with bookings 40% over 2019 and Norwegian is seeing similarly strong numbers, although it admits much of that is due to occupancy that would not normally be available now. However, it shows that people want to go on cruises again.
Now what
However, cruise operators have far more debt now than before the pandemic, and they’re burning through a lot of cash to stay afloat. Carnival just completed a stock issue at a steep discount to raise $1 billion. The announcement of the stock sale at a price below $10 per share sent the stock tumbling as investors feared the company could burn through its cash on hand if it is unable to stay shipshape on bookings.
Analysts see the move as a proactive move by Carnival, not a defensive one, and after the CDC’s decision to drop its monitoring requirements on the industry, a calmer atmosphere could help the stock float.
However, if the economy continues to deteriorate, cruise line stocks will be in even rougher seas in the coming months, and there is a risk that the latest monkeypox outbreak could plunge the industry back into chaos. 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 improvement from the year per year.
Investors will look at how much the cruise lines are burning through their available cash. If it’s significantly worse than it has been (not that anyone is predicting that at this time) it could mean that Norwegian and Royal Caribbean may also have to use the stock markets to raise more money.
With these stocks already sinking into Davy Jones’s 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.
