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Why Royal Caribbean Stock Dropped 5% This Morning

By Rich Smith - May 11, 2020 at 2:27PM

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An analyst crunches the numbers and finds the cruise company short of cash.

What happened

Shares of cruise operator Royal Caribbean (RCL 1.09%) sank more than 5% in early trading Monday before recovering some of their losses. As of 1:45 p.m. EDT, the stock was down about 3.2%.

So what

Last week, Royal Caribbean updated investors on its financial situation. Several months into the coronavirus crisis, with its ships still confined to port, the cruise giant has about $2.3 billion in cash reserves. But it is burning between $250 million and $275 million a month in operating expenses as it sits revenue-less.

Collage showing a cruise ship, a man in a face mask and a microbe

Image source: Getty Images.

In today's note out of Morgan Stanley, the investment banker does a quick bit of calculator work and determines that $2.3 billion divided by $250 million gives Royal Caribbean 9.2 months until it is out of cash (or 8.4 months at the $275 million rate). Giving Royal Caribbean some benefit of the doubt, the analyst says the cruise line could survive for up to 10 months at zero revenue, reports TheFly.com.

Now what

But whether the correct number of months is 8, 9, or 10, time is clearly running out. Accordingly, Morgan Stanley makes the logical deduction that if the recession, the coronavirus pandemic, and the CDC's no-sail order don't end soon, Royal Caribbean is probably going to have to sell more shares and raise more cash at some point to keep itself afloat.

When those shares are sold, it will mean dilution for existing shareholders. The chance of that happening is driving some investors out of the stock today.

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