The three major cruise lines -- Carnival (CCL -23.25%), Royal Caribbean (RCL -13.15%), and Norwegian (NCLH -18.04%) -- have been shut down completely by an order from the Centers for Disease Control that bans all cruises from U.S. ports for 100 days (though it could be less than that if the public health crisis abates).
That has forced all three companies to dock their ships, lay off workers, and do everything possible to conserve cash. They have also tapped credit lines, and either raised new capital already (in the case of Carnival) or seem very likely to need to do so (Norwegian and Royal Caribbean).
How deep is the sea of red ink?
It has been widely reported that Carnival, the biggest of the three cruise lines, will spend about $1 billion a month for ongoing operations and to keep its ships ready to go when it gets permission to sail again. The other two cruise lines have not given estimates, but it's very clear that significant money is going out to maintain ships, provide customer service, and issue refunds, while very little is coming in in the form of new reservations.
This has, of course, devastated the stocks of all three companies. Here's where each one stood at the market close April 14 compared to its 52-week high:
- Carnival: $12.51 ($56.04)
- Royal Caribbean: $37.84 ($135.32)
- Norwegian: $12.35 ($59.78)
Those are, of course, bleak numbers -- and you have to at least consider that bankruptcies are possible. But you should also remember that all three companies were profitable before this crisis.
Should I buy, sell, or hold cruise line stocks?
If you own cruise line stocks, it likely makes sense to hold them. The damage has been done, and you probably believed in these companies before the coronavirus pandemic. If, however, you honestly believe people won't get back on ships, or see a bleak outlook for the industry, then you may want to cut your losses.
I'm personally a fan of buying -- if you understand the risks. And there are a lot of them:
- Ships might not be allowed to sail for longer than the current 100-day closure (though that could also end up being shorter).
- Casual customers might no longer consider cruises as a safe vacation option.
- The CDC could recommend (or even enforce) that people over a certain age don't cruise until a vaccine has been created.
- Limited marketing budgets could make it hard for cruise lines to win customers back.
- Prices remain depressed due to limited demand.
It's also possible that any (or all) of the cruise lines file for Chapter 11 bankruptcy. When that happens -- and it could make sense as a strategic move -- shareholder value generally gets wiped out.
Buy cruise line stocks if you're a long-term investor who accepts that this may be a very difficult recovery. It's also important to understand that your investment could go to zero.
If you choose to buy, you should be careful and make sure cruise lines are a very small part of your portfolio. There could be value here, but it may take a very long time to unlock it.