What happened
Shares of cruise line stocks plunged in trading on Tuesday as the market continues to grapple with economic uncertainty. This follows another sharp drop on Monday because of an analyst note that spooked investors.
Industry giant Carnival (CCL 0.43%) (CUK 0.63%) was down as much as 11.3% in trading today, Royal Caribbean Cruises (RCL -0.26%) fell 10%, and Norwegian Cruise Line Holdings (NCLH 0.83%) dropped 11.8%. Shares of the three stocks were still down 11.1%, 9.3%, and 11.7% respectively at 1:45 p.m. ET.
Image source: Getty Images.
So what
The news continues to be murky at best with companies warning of slowing sales in a variety of sectors, consumers experiencing inflation, and the Federal Reserve continuing to indicate that it will keep raising interest rates.
Today's news was that Snap is experiencing far slower advertising spending in just the last few weeks than expected and that indicates companies from direct response retailers to gaming companies to big brands are pulling back on their spending. This could be an early indication that the economy overall is slowing, which will eventually make its way to people's pocketbooks.
To be clear, the economy isn't yet diving into a deep recession, but the market doesn't quite know what to make of this news. If the economy is slowing as interest rates are rising, it puts businesses and policymakers in a tricky position.
Now what
The chart below shows why cruise line stocks are reacting so quickly to weakening economic projections. All three of these cruise line companies added a tremendous amount of debt to make it through the financial crisis and that has made their businesses riskier. At the same time, operating cash flow is not back to a sustainable level.
CCL Total Long Term Debt (Quarterly) data by YCharts
This risk isn't new to the cruise line industry, but if spending is going to decline and consumers are going to pull back on spending, then cruises may be one of the first expenses to go. At a time when investors were hopeful that consumer spending will pick up and the pandemic subsides, the opposite may be true.
Despite the drop in cruise line stocks today, I still see more risk than opportunity. These companies have a tremendous amount of debt and operations aren't anywhere near where they were in 2019. I'm staying out of cruise stocks right now and until they start generating positive cash flow, this is a market that I'll watch from the sidelines.
