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Should I Buy Cruise Line Stocks?

By Daniel B. Kline – Apr 4, 2020 at 8:34AM

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The industry has taken a beating due to coronavirus.

The cruise industry has been hit by multiple major issues due to coronavirus. Ships, of course, have been docked since mid-March, with optimistic outlooks having a limited number returning to sea by mid-May. In addition, the industry faces negative perceptions, as people wonder if they're safe being in an enclosed space with so many others.

This has led to a cash crunch for Royal Caribbean (RCL 1.26%), Carnival (CCL -6.06%), and Norwegian Cruise Line (NCLH 0.53%). All these lines have handled that in different ways, with Royal tapping its credit line, Carnival raising $6 billion largely on unfavorable terms, and Norwegian, the smallest of the three, not having made any moves.

An empty cruise ship deck.

No cruise ships are operating at the moment. Image source: Getty Images.

Will the cruise industry survive?

The industry won't look normal for quite a while. Whether it comes back in May, June, or even later, many people will be wary of cruising. Others will be cash-strapped and unable to spend money on any sort of vacation.

All three cruise lines will also have a backlog of customers with credit for future cruises due to cancellations. That will lead to some sailings generating less new cash, because cabins are being filled by people who aren't paying.

That problem will be exacerbated by prices for cruises being depressed. Carnival, Royal Caribbean, and Norwegian are all still taking bookings for future dates. The prices for those appear to be lower, especially for the next few months (that's anecdotal, but I cruise nearly monthly and examine prices regularly).

All three companies, however, do have strong bases of loyal customers. Those people (which certainly includes me) will likely be some of the first to come back, joined by people looking for a deal, and perhaps people who have already had coronavirus.

Carnival has proven that at the right price (a steep one, as its bonds are paying a nearly 12% yield), the industry can find the money it needs. Royal Caribbean has tapped roughly $3.5 billion in existing credit lines and has taken steps to slow spending (as have all three). Norwegian has yet to make any moves to draw down its credit or raise additional funds.

Should I buy cruise line stocks?

Carnival has paid a very steep price for the cash it needs to stay afloat. If Royal Caribbean and Norwegian can avoid having to do that, they will still be in heavy debt, but at more favorable terms.

Customers will eventually come back -- once they're convinced it's safe. Cruise lines have long battled the "floating petri dish" line of thinking. Yes, people on cruises are confined in close quarters, and in very rare cases that has led to mass outbreaks.

Those situations -- like plane crashes -- are few in number but receive significant media coverage, which makes them seem more common. Anyone who takes a cruise sees the steps the cruise lines take to keep ships clean. On Royal Caribbean ships (on which I have sailed the most often), public areas are cleaned visibly and regularly. Bathrooms get cleaned often and reminders to wash your hands are everywhere.

All three companies are trading at major discounts from their 52-week highs as of the close on April 3:

  • Royal Caribbean: $24.39 (down from $135.32)
  • Carnival: $8.49 (down from $56.04)
  • Norwegian: $8.46 (down from $59.78).

Those drops make sense with the industry at a standstill until an unknown date. If, however, you believe that any or all of these brands will eventually get back to the business levels they hit in 2019 -- and I believe that -- then you believe their stocks will recover.

That probably won't happen quickly. It may take years to return to normal, and added debt will slow capital spending on things like glitzy new ships. If, however, you're willing to go on a voyage that may last for years, then I'd suggest taking modest positions in your favorite (or all three) cruise lines.

Daniel B. Kline 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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Stocks Mentioned

Royal Caribbean Cruises Ltd. Stock Quote
Royal Caribbean Cruises Ltd.
$44.02 (1.26%) $0.55
Carnival Corporation Stock Quote
Carnival Corporation
$6.98 (-6.06%) $0.45
Norwegian Cruise Line Holdings Stock Quote
Norwegian Cruise Line Holdings
$13.29 (0.53%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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