It's been rough for cruise line stocks since Carnival (CCL 6.62%) (CUK 6.21%), Royal Caribbean (RCL 3.56%), and Norwegian Cruise Line Holdings (NCLH 4.87%) have been accused of being floating Petri dishes during the coronavirus crisis. There is no clear timeline for when vessels will start sailing again, and it's unclear when there will be optimism for the travel niche.
I'm not entirely bearish on the investments. I've pointed out the silver linings of the industry at current valuations, and last week even offered up a scenario where the three stocks go on to double from current levels. However, taking out the all-time highs we saw for Carnival two years ago and at Royal Caribbean and Norwegian in January -- an exercise that would require the stocks more than quadruple if not quintuple -- just doesn't seem realistic anymore. Let's go over some of the reasons why investors may never be able to party like it's 2019 again.
1. Demand is plummeting
If you've never been on a cruise, there's a good chance you've removed the open seas from your bucket list. The headlines and horror stories are just too negative, and it's not as if marketing departments can shake an Etch-a-Sketch and make them all go away. Demand will have to come from existing cruise line customers, and they aren't coming back anytime soon.
Most folks with canceled sailings aren't taking up cruise lines on their offers for sweetened future cruise credit in lieu of an immediate refund. Carnival admitted in an SEC filing that 55% of the impacted passengers asked for refunds over future cruise credit that includes an additional $300 to $600 in on-board credit.
Some cruise fans also might not have much of a choice. Some lines are blocking anyone 70 or older from going on a trip without a physician's note clearing them to travel. If you've ever been on a cruise -- particularly in the off-season -- you'll know there are a lot of senior retirees on board. Even if this requirement goes away once we sail past this COVID-19 pandemic, there are probably a lot of older cruise buffs who aren't going to return after being singled out and inconvenienced here.
2. Legal liabilities are mounting
Everywhere you turn there are future lawsuits waiting to happen. Social media is ablaze with folks who are still waiting for refund requests. Passengers and crew members continue to die from the coronavirus they contracted on the ships.
Carnival has generated the most negative headlines for mishaps on its vessels, but even Royal Caribbean has seen three crew members die in the past two weeks. There will be a lot of people turning to legal fisticuffs to be made whole by the cruise lines, and this is going to sting the finances and the image of the industry.
3. Margins and earnings per share aren't recovering
There are a lot of fixed costs involved in a cruise sailing, and it's hard to fathom when the industry will be as profitable as it used to be. With demand shrinking, it will be hard to see fares move higher. Social distancing norms may dictate that ships sail with fewer occupied rooms, and passengers won't be the ones picking up the tab for the empty berths in the form of higher prices.
Profits aren't going to recover to where they used to be, and even if we did get to that point it's not as if earnings per share will follow suit. Cruise lines need liquidity, and right now that is sometimes coming by issuing new shares at dilutive price points that will lower net income on a per-share basis. Carnival sold $500 million worth of stock at $8 three weeks ago, the same industry leader that was trading for more than $72 in early 2018. In short, there is no path for margin and profits to recover, and even if that were to happen, earnings per share would still have more ground to make up.
4. The U.S. bailout isn't coming
The travel industry in general is going to be on ice for some time, but at least airlines and hotel operators can take heart in their access to government infusions of capital. The cruise lines have been understandably shut out of U.S. funds. The three publicly traded cruise lines are registered under foreign flags to take advantage of their floating businesses, paying minimal U.S. tax bills.
Cruise lines have turned to dramatic financing moves at sky-high borrowing costs, and that will keep them running for a couple of months. What happens next? Bailouts for airlines and hoteliers during the current interruption will not stop some of the weaker players from faltering. One can only expect an even more feverish shakeout for the cruise lines.
5. The economy won't be kind
We had more than a decade of monthly economic expansion earlier this year, an uptrend that likely helped fuel a lot of fun cruise vacations. We're somewhere else completely now. The economic funk will linger, and the recession will be global.
Even after we lick the COVID-19 crisis -- and we will -- it's not as if we can resume where the economy was before it fell off the cliff earlier this year. The winning streak will have to start anew, and with that, the lack of confidence that consumers see in steady expansion during a long bullish economic run. Add it all up and these are rough waters for investors expecting cruise line stocks to truly bounce back to peak levels.