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Should You Be Buying More Royal Caribbean Stock?

By Lawrence Rothman, CFA – Sep 23, 2020 at 11:00AM

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The cruise operator's shares been hit hard this year -- is it time for investors to get back on board?

Efforts to control COVID-19's spread have taken an enormous toll on the cruise industry, and Royal Caribbean Cruises (RCL 0.68%) isn't alone in having its shares take on water in 2020. The world's second-largest cruise operator has seen its stock price drop by more than 50% this year.

With losses this massive in mind, investors should be asking themselves: What comes next for the pandemic, and hence, the industry? Has the worst passed us, and is this an opportunity to pick up shares at a good value?

Empty lounge chairs on the deck of a cruise ship

Image source: Getty Images.

Recessions are not kind

The pandemic has caused widespread layoffs, with U.S. weekly unemployment claims continuing above 800,000. The virus's effects have caused the U.S. and other countries to officially fall into a recession.

Generally, economic sluggishness hurts Royal Caribbean's results. Its cruises are aimed at the higher end of the market -- the premium and ultraluxury segments. But its target customers certainly are not immune to the economic cycle, and many people pare back on travel, including major cruise vacations, during difficult periods. Turning to the last decade's recession, Royal Caribbean's 2009 revenue dropped by 10% to $5.9 billion from $6.5 billion.

As severe as that recession was, the company's revenue rebounded the following year as economic conditions improved, in turn helping to boost demand for its cruises. However, the current downturn is certainly not typical, and COVID-19 has put us in uncharted waters.

Foggy forecast

While there is optimistic talk about a vaccine coming soon, there are big questions as to when one will come to the market, how effective and widely available it will be, and whether people will even take it.

Additionally, governments have sometimes issued confusing guidance. Most recently, the U.S. Centers for Disease Control and Prevention (CDC) stated that the virus can spread airborne from more than six feet away before quickly walking back the comment. The continuing confusion makes it very hard to ascertain when travel will return to anything approaching prepandemic levels.

Royal Caribbean operates several brands (including its namesake and Celebrity Cruises) traveling to more than 1,000 destinations across the seven continents. Starting in March, it suspended cruise activity through at least the end of October.

Its goal is to resume its cruises in November. However, while certain governments may open up travel, including cruises, quicker than others, the timing remains a big unknown. For instance, this month the Australian government extended its ban on cruises in the region until the end of this year. Of course, even if Royal Caribbean ships start sailing again, that is no guarantee people will flock back to cruising in light of health and economic concerns.

In the meantime, the company's revenue has been battered, falling by 94% in the second quarter to only $175.6 million from $2.8 billion in the year-ago period.

No wonder the shares remain weak.

No dividends

With activity screeching to a halt, Royal Caribbean worked out an agreement with its lenders whereby it would suspend its dividends. While that move prudently provided the company with access to liquidity and financial flexibility, it does mean shareholders cannot rely on regular dividend payments for a while.

Even at its stock's current low price level, there is just too much uncertainty for my liking. You should cruise by Royal Caribbean stock without picking up any additional shares.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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