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There's More Bad News for Carnival, Royal Caribbean, and Norwegian Cruise Line Investors

By Rick Munarriz – Jun 24, 2020 at 11:10AM

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A credit rating downgrade and a pair of analyst downgrades rock the cruise line stocks.

Despite their buoyant share prices, the recent developments for the cruise line stocks aren't very encouraging. An analyst is downgrading shares of Norwegian Cruise Line Holdings (NCLH 16.84%) and Royal Caribbean (RCL 16.65%) on Wednesday morning, and that follows S&P Global Ratings downgrading Carnival's (CCL 13.29%) (CUK 14.50%) credit rating -- to noninvestment grade or junk status -- on Tuesday afternoon.

With the industry now pushing out future sailings until mid-September at the earliest, it's easy to see why credit rating agencies are getting a little nervous here. All three cruise line operators have raised billions in new financing apiece in recent months, and they are years away from approaching last year's profitability levels. The stock downgrades are a different beast, as Wall Street's reacting to three investments that have more than doubled in value off their springtime lows despite fundamentals that continue to erode. 

A couple enjoying a meal on an outdoor deck of a Royal Caribbean cruise ship.

Image source: Royal Caribbean.

Reality as a port of call

Barclays analyst Felicia Hendrix is downgrading Royal Caribbean and Norwegian Cruise Line from overweight to neutral. She doesn't see much near-term upside at current levels. The best-case scenario is that the stocks tread water at current levels until the industry resumes normal operations. They could also potentially head lower again given the stiff current valuations with revenue and earnings going the wrong way for now and unlikely to return to previous levels for some time. There could be more delays and disruptions on the road to resumption, and she thinks there are more compelling opportunities in the lodging and gaming sectors with better risk-to-reward ratios. 

She is lowering her price target on Royal Caribbean stock from $55 to $50, 8% below Tuesday's close. She is sticking to her earlier price goal of $21 on Norwegian Cruise Line, offering 16% of upside from Tuesday's close. 

Her price targets are actually higher than those given by Chris Woronka at Deutsche Bank, who on Tuesday morning raised his near-term price goals for all three publicly traded stocks. The stocks were trading at a premium of 14% to 33% to those elevated targets -- not a good thing if you're a bull -- but the stocks responded by closing 4% to 6% higher on the day. 

The stocks are climbing, despite a perfect storm brewing. The COVID-19 pandemic isn't showing any signs of going away, and that mid-September date for cruise ships to start sailing again isn't written in permanent ink. Toss in the growing chances that the global recession will only get worse as the year drags on, and we could start to see more passengers on canceled cruises opt for cash refunds over sweetened credit on future sailings. 

Shares of Carnival, Royal Caribbean, and Norwegian Cruise Line may continue to head higher, but with fundamentals going the other way again, gains will only make the investments that much more speculative at this point. The risks are as high, as the stocks have gotten speculative at this point. Sail responsibly, investors. 

Rick Munarriz 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.
$43.85 (16.65%) $6.26
Carnival Corporation Stock Quote
Carnival Corporation
$7.76 (13.29%) $0.91
Carnival Corporation Stock Quote
Carnival Corporation
$6.87 (14.50%) $0.87
Norwegian Cruise Line Holdings Ltd. Stock Quote
Norwegian Cruise Line Holdings Ltd.
$13.32 (16.84%) $1.92

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

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