Cruise company Royal Caribbean Group (RCL 0.32%) continues to struggle amid the shoals of COVID-19's tremendous travel and cruise industry fallout, much like the rest of the industry. Its third-quarter results, published on Oct. 29, missed Wall Street analyst consensus estimates in both revenue and earnings per share (EPS), sending the stock lower in trading. Management also guided for a net loss for the fourth quarter and full year 2020, though at this point it doesn't know how big it will be.
The size of that net loss, and the speed of Royal Caribbean's recovery, could depend in part on the outcome of the U.S. presidential election. Who ends up in the Oval Office could have a direct impact whether the CDC's phased-in resumption of cruises continues, or if no-sail orders are reimposed.
For investors looking to add Royal Caribbean shares to their consumer discretionary stocks portfolio, or to increase an existing stake in the cruise company, the election's outcome appears to be of interest, especially for certain trading strategies.
Political fallout for cruise operations
The outcome of the election has the potential to affect Royal Caribbean's near-term prospects. The CDC is now allowing "a phased approach for the safe and responsible resumption of passenger cruises" under its "Framework for Conditional Sailing Order," as The Hill reports, but this could be changed by a different administration.
A Joe Biden administration would be far more likely to impose no-sail orders moving into 2021, according to some sources. An analyst for Macquarie, Paul Golding, told Business Insider a "new administration would likely be less sympathetic toward cruise lines reopening without a vaccine." But analyst opinion isn't unanimous on a Biden White House making potential cruise stock recovery run aground.
Tom Essaye of Sevens Report thinks a Biden win could bring major benefits for all cruise stocks, including Royal Caribbean, according to a report by Benzinga. Essaye sees the possibility of cruise lines cashing in on a possible $5 trillion Biden stimulus package in the short term, and that in the longer term, "re-opening travel to Cuba would be another positive catalyst for this beleaguered space once business starts to return to normal."
Other questions to consider
The presidential election clearly has the potential to alter the cruise sector's fortunes, but investors should remember it isn't the only force in play. For example, if a massive second wave of COVID-19 begins to overwhelm hospitals with new patients, or if one or more high-profile outbreaks occur on board cruise vessels once sailing resumes, it is almost certain the Trump administration will impose fresh no-sail orders.
On the flip side, a Biden administration wouldn't begin making decisions about no-sail orders until after the inauguration on Jan. 20, 2021. During a live chat on social media on Oct. 29, Dr. Anthony Fauci said COVID-19 vaccines could see limited availability starting in late December 2020 or early January 2021.
Fauci said the country should know in "December whether or not we have a safe and effective vaccine," and while the initial doses would go to people with the highest risk, the speed of a wider roll-out following up could potentially effect the duration of any no-sail orders in 2021. An effective vaccine deployment could also buoy investor confidence in cruise stocks even before herd immunity is achieved through ongoing vaccination, as potential customers see a future without COVID-19.
The phased reintroduction of sailing under the current CDC guidelines, if it proves to be successful and allows safe cruises even while cases are rising generally, could defuse any possible Biden administration no-sail order if Royal Caribbean and others demonstrate they can maintain good health among their passengers.
These possibilities are a key reminder that while the election is an important factor in what happens to cruise companies in the near future, it isn't the only factor capable of strongly altering the course of Royal Caribbean's operations, or the only one you should watch and weigh in your decision.
Both a strong pandemic outbreak or rapid deployment of an effective vaccine could make the response of either administration relatively identical: either renewed no-sail orders, or a path forward for resumed voyages.
Royal Caribbean's position
That Royal Caribbean is still feeling the negative effects of COVID-19 is clear from its Q3 earnings report. The company had an adjusted net loss of $1.2 billion ($1.3 billion according to generally accepted accounting principles, or GAAP) for the quarter, translating to a $5.62 adjusted ($6.29 GAAP) net loss per share. These metrics contrast to Q3 2019's $896.8 million adjusted net income and $4.27 adjusted EPS. Management says it expects "a net loss on both a US GAAP and adjusted basis for its fourth quarter and the 2020 fiscal year, the extent of which will depend on the timing and extent of the return to service" -- timing which could, once again, be partly determined by the president.
The cruise sector is almost certain to powerfully rebound once vaccinations bring the pandemic under control. Cruise price comparison website CruiseCompete's CEO Bob Levinstein told Business Insider in August there is "really too much money to be made in this business for the business to go away." But an important question for investors is whether Royal Caribbean can survive on its cash reserves without going bankrupt before normal cruises resume.
The Q3 report says the company's average monthly cash burn during suspended operations is $250 million to $290 million, though it spent $1.1 billion during the quarter. On a positive note, the release states "expenses sequentially declined each month within the quarter as the fleet achieved the desired levels of layup by end of August 2020." Its liquidity at quarter-end, $3.7 billion, is enough to maintain the current rate of cash burn for approximately 13 to 15 months assuming no income, though existing newbuild commitments for additional ships and various debt maturities would shave several months off the estimate.
Assuming sailing is permitted, Royal Caribbean currently has $1.8 billion in customer deposits for 2021 bookings. Executive Vice President and CFO Jason Liberty said the company continues its efforts to "aggressively manage our spend and take opportunistic actions to bolster our financial position," and noted executives remain "optimistic that with the gradual resumption of cruise operations, our cash flow from operations will sequentially improve."
Investing before the election
The election will certainly have effects on the cruise industry and Royal Caribbean, but just what those effects are depends on how presidential decisions mesh with other events. Fresh COVID-19 outbreaks and the speed and availability of a vaccine could lengthen or shorten the period of reduced or absent cruise income. Assuming Royal Caribbean can resume normal operations within nine to 11 months, it should be capable of surviving the intervening dry spell without going bankrupt, and the current depressed share prices can be viewed as a buying opportunity in that context.
A lot of the choice in deciding whether to buy Royal Caribbean before the election depends on your personal investing strategy. The cruise industry is almost certain to rebound strongly in the long term, reaching and likely exceeding previous highs once pent-up demand is unleashed by an effective vaccine or the hypothetical natural decline of COVID-19.
If you are paying for Royal Caribbean shares entirely with your own money, any temporary drop in the shares caused by further lockdowns imposed won't affect the gains made once the eventual rebound occurs, whether that's sooner (possibly under Trump) or later (possibly under Biden). In this case, the election won't materially affect the eventual profitability of your investment, unless you want to wager on a Biden win driving share prices temporarily lower and providing an even more attractive entry point for buying in. Overall, though, the election outcome is arguably neutral long-term for Royal Caribbean under most scenarios.
If, on the other hand, you're borrowing money on margin to increase your investment size, buying before the election could end up costing you money if Biden wins and Democratic policies cause Royal Caribbean's share value to drop significantly below its current level. Those investing on margin would probably be prudent to wait until the election is decided before deciding whether to buy Royal Caribbean.