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Why Carnival Corporation, Royal Caribbean, and Expedia Stocks Slipped Yesterday

By Rich Smith - Apr 21, 2020 at 10:56AM

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Oil prices went bonkers, yes. But there are more specific reasons these stocks are going down.

What happened

Oil prices went absolutely bonkers yesterday, with prices of WTI crude oil due for delivery in May closing in negative territory: negative $18.15 per barrel, according to 

Stock markets didn't know precisely what to make of that, but they seemed pretty sure that whatever it meant, wasn't good, so stock prices plunged deeply into the red.

Three stocks that appeared to have little to do with the energy industry, though -- cruise operators Carnival Corporation (CCL 1.97%) and Royal Caribbean (RCL 1.09%), and travel-and-cruise reservation specialist Expedia (EXPE 1.66%) -- also went down.

And the reason for that had little to do with the price of oil.

3 red arrows going down and crashing through the floor

Image source: Getty Images.

So what

If you want to know why Carnival, Royal Caribbean, and Expedia stocks went down yesterday, you're best off asking the stock analysts at J.P. Morgan.

J.P. Morgan, you see, chose yesterday to announce deep price target cuts on both Carnival stock, and Royal Caribbean, according to Carnival stock has fallen 77% over the past year to a share price below $12. Royal Caribbean has lost 71%, and trades at a share price below $35.

J.P. Morgan is coming a bit late to this target price-cutting party. Be that as it may, here's what the bank had to say yesterday:

Assuming neither cruise line leaves port before the end of June, and business doesn't really start to recover until next year, J.P. thinks Carnival might generate somewhere between 50% and 65% of its 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2021 -- and won't earn again what it earned last year before 2022 or so.

J.P. thinks this is only good enough to merit a neutral rating on Carnival stock, and a $16 price target. Regarding Royal Caribbean, the analyst is more a bit more optimistic, saying it sees the shares returning to $54 within a year, and giving it an outperform rating.

Now what

Now, you may notice that $16 is higher than $12, and $54 is more than $35.

So, despite both stocks falling on J.P.'s report, the fact remains that J.P. Morgan still sees both stocks as substantially undervalued. Indeed, based on these numbers, J.P. is predicting 33% stock price gains likely at Carnival and more than 50% profit potential at Royal Caribbean, over the next 12 months.

Regardless, with both stocks being driven more by sentiment than fundamentals these days, the analyst warns that all cruise stock can be expected to "trade together in the near term." In short, if one goes up, all will go up, and if one goes down, so shall they all. Expedia stock, with its business partly dependent on the health of the cruise industry, should move in tandem -- which is precisely what happened yesterday.

Meanwhile, with no news to offset the negative sentiment expressed by J.P. Morgan yesterday, both Carnival and Royal Caribbean stocks -- and Expedia too -- are continuing to fall in early morning Tuesday trading.

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Stocks Mentioned

Expedia, Inc. Stock Quote
Expedia, Inc.
$96.40 (1.66%) $1.57
Royal Caribbean Cruises Ltd. Stock Quote
Royal Caribbean Cruises Ltd.
$35.29 (1.09%) $0.38
Carnival Corporation Stock Quote
Carnival Corporation
$8.82 (1.97%) $0.17

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

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