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Now Might Be a Good Time to Cover Your Royal Caribbean Short Position

By Rick Munarriz - Aug 11, 2020 at 10:54AM

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With cash crunch concerns abated and passengers hungry to start sailing again next year, it's hard to bet against the class act of the cruise line industry.

Shares of Royal Caribbean (RCL 0.10%) led cruise stocks higher with a 10% pop on Monday, following a well-received earnings report to kick off the new week of trading. There's still a long way to go before Royal Caribbean, Norwegian Cruise Line Holdings (NCLH 1.48%), and Carnival (CCL 1.93%) (CUK 1.91%) claw their way out of the year-to-date stock losses that investors have had to endure, but there are some promising signs that Royal Caribbean -- at least -- is starting to steer in the right direction. 

Even what may seem to initially be a bit of bad news on Tuesday morning -- an analyst lowering his price target on the stock -- is actually fairly positive. Stifel Financial's Steven Wieczynski is lowering his price goal on the shares from $85 to $72, but even the new mark represents 26% of upside from Monday's close. Wieczynski remains bullish on Royal Caribbean stock, impressed by both its healthy liquidity levels and encouraging booking trends as we look out to next year. 

A person zip-lining in Labadee, Haiti, with a Royal Caribbean cruise ship in the water

Image source: Royal Caribbean.

Sailing into 2021

There's no denying that sentiment is pretty uninspiring for the cruise line industry right now. Carnival, Royal Caribbean, and Norwegian have suspended revenue-generating sailings since early March, shortly after the COVID-19 crisis washed up on our shore. Other travel segments including airlines, hotel operators, and car rental agencies scaled back their businesses without entirely shutting down, but you won't see a stateside cruise ship setting sail until November at the earliest.

The initial concern with the industry was if it could survive. Media outlets have highlighted the number of onboard cases of COVID-19 for both passengers and crew members and the ease with which a highly contagious virus can spread on a cramped cruise ship. The industry will have a lot of public opinion to reshape when it's back in business. The good news is that there is little doubt that Royal Caribbean will stay in business. 

Royal Caribbean has raised roughly $6.5 billion since announcing the suspension of its global operations. It had $4.1 billion of liquidity at the end of June. Royal Caribbean's cash burn rate is running at $250 million to $290 million during the interruption. Even if it doesn't raise new funds, it should be fine for at least another year. If cruise ships aren't sailing by next summer, we'll probably have bigger problems than worrying about the financial stability of a cruise line. 

Weiczynski, for one, doesn't see a capital raise at Royal Caribbean anytime soon. Right now, Royal Caribbean is focused on a safe return to business. The industry was initially naive. Carnival, Royal Caribbean, and Norwegian had at first canceled just the first few weeks of cruises through March and April. Drawing the line in the sand recently for a resumption at the end of October finds the major players taking a more conservative stance than the Centers for Disease Control and Prevention's no-sail order. 

Royal Caribbean was the cruise line stock to own before the pandemic. It has historically posted strong growth and higher profit margins than its two publicly traded peers. There is no reason why margin and revenue growth leadership should change when we are sailing again.

Sentiment is already starting to turn positive in the eyes of cruise-loving consumers. A lot of the initial booking activity through March and April was folks from canceled sailings using their enhanced cruise credits on future sailings. Since mid-May, Royal Caribbean has seen new reservations account for more than 60% of its total bookings. Reservations through the first quarter of next year are running soft at Royal Caribbean, but things turn robust as we approach next summer, as well as the second half of 2021. 

A lot is naturally riding on the neutralization of COVID-19 and a smooth recovery from the global recession. However, now that Royal Caribbean has enough money to feed the meter, time is its ally instead of its enemy. 

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.
$41.72 (0.10%) $0.04
Carnival Corporation Stock Quote
Carnival Corporation
$10.54 (1.93%) $0.20
Carnival Corporation Stock Quote
Carnival Corporation
$9.60 (1.91%) $0.18
Norwegian Cruise Line Holdings Ltd. Stock Quote
Norwegian Cruise Line Holdings Ltd.
$13.76 (1.48%) $0.20

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

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