As the novel coronavirus outbreak getting worse, it is creating a problem that is going to be on the minds of investors for quite a while. Many companies have reported supply chain issues that have held up manufacturing or forced store closures as authorities institute draconian measures to contain the spread of the virus which causes the disease COVID-19.
One company that has been hit hard is Royal Caribbean (NYSE:RCL). Its stock has fallen 22% in the past week alone. Since the start of the year, it has declined by a whopping 52% as the COVID-19 situation worsens.
The company had, in fact, just reported a sparkling set of earnings results for the fiscal year 2019. Net income was at a record high of $1.88 billion, up 3.7% year over year, driven by a 15.3% year-over-year increase in total revenue.
With the stock now trading at a five-year low, could the company be a potential bargain?
Travel curbs are hitting hard
Trouble started brewing back in late January when news outlets began reporting on an outbreak of COVID-19 off the coast of Japan aboard the Diamond Princess, a cruise ship belonging to Carnival (NYSE:CCL). In early February, due to the then-widening effects of the virus in China, Royal Caribbean canceled eight cruises out of Chinese ports over March, in addition to three cancellations announced earlier.
Since then, COVID-19 has claimed its first victim in the U.S., while travel curbs have been tightened. The White House recently announced new restrictions on international travel. These curbs add on to those already in place in many other countries. With Italy and South Korea among those reporting a huge spike in cases, it looks as if these curbs are not going to be eased anytime soon.
Canceled cruises and refunds
Royal Caribbean has canceled all its China and Hong Kong sailings through the March 21 departure for its Spectrum of the Seas ship, while all cruises on the Quantum of the Seas have been canceled through the end of March. All affected passengers will receive full refunds. These moves will not only hurt the company's revenue but will also result in significant cash outflows.
With the situation remaining uncertain, Royal Caribbean may have to cancel even more cruises in the coming months. In an announcement last month, the company had quantified the impact of cancellations up through the end of April, with a projected total hit of $1.20 per share to full-year earnings. This translates to a 13.4% drop if we use the EPS of $8.97 for the fiscal year 2019 as a comparison.
If the COVID-19 situation is not controlled soon, the cancellation of even more cruises could lead to a more significant impact on EPS for the fiscal year 2020.
Additional costs are piling up
Besides the loss of revenue, Royal Caribbean also has to contend with higher operational costs. These include the need to conduct mandatory temperature screenings for all passengers, as well as more-stringent disinfection measures to ensure that all surfaces, rooms, and common areas are declared virus-free.
These measures are necessary to instill confidence again in the cruise industry, but will inevitably drive down earnings even more in the near term.
A sharp but temporary hit to earnings
With a rash of cancellations within the cruise industry, mounting travel curbs, and additional costs being layered on, things look pretty bleak for Royal Caribbean right now.
But investors need to keep in mind that they're in a marathon, not a sprint. Negative sentiment and fear of the unknown have driven the stock of the company down to bargain-basement levels. It's trading at just around 7.3 times its fiscal year 2019 earnings, implying that investors have assumed the worst.
Though the impact from COVID-19 may linger even after the crisis has been resolved, I am confident that people eventually will start streaming back to cruises. And when investors look back five years from now, they might blame themselves for missing out on a golden opportunity to buy into a brand-name cruise company on the cheap.