What happened
Shares of cruise line stocks had a rough start to the week after a Wall Street analyst downgraded expectations because of the risk of a recession. Shares are trading lower for all of the major cruise lines despite the stock market rising slightly in morning trading.
As of 11:00 a.m. ET, Carnival Corporation (CCL 1.81%) is down 2.9%, Norwegian Cruise Line (NCLH 1.55%) is down 3%, and Royal Caribbean Cruises (RCL 0.45%) has fallen 3.5%. The stocks were down as much as 6.2%, 6%, and 6.8%, respectively.
So what
The biggest news today was Stifel Nicolaus analyst Steven Wieczynski lowering earnings estimates and the price target for Carnival. Adjusted EBITDA expectations dropped from positive $103 million in 2022 to negative $244 million and, in 2023, fell from $5.0 billion to $4.16 billion. Wieczynski's stock price target was also reduced to $20 per share from $30.
It wasn't really anything new that drove the estimate or price target change but the reality that a recession is likely in the near future. The market seems to be pricing in an economic slowdown of some sort, and with Carnival's shares trading between $10 and $11, the thought was to bring expectations in line with reality.
Not surprisingly, related cruise line stocks followed Carnival lower in trading today. Carnival is the biggest cruise line, so it's natural that this will pull the entire industry down.
Now what
It's hard to see how even the 2023 adjusted EBITDA estimate is possible given the current state of the cruise industry. You can see that debt piled up during the pandemic, and operations still haven't gotten to the point that they're generating positive cash flow.
CCL Total Long Term Debt (Quarterly) data by YCharts.
Despite the drop in price for cruise line stocks, it's hard to argue there's much value for investors. Even in an optimistic environment, these companies will have a hard time paying down debt, and eventually, that debt will need to be refinanced, likely at a higher rate than they got during the last three years.
I don't see a reason to jump into cruise line stocks today, and I do see continued pressure ahead for the industry. But now, it won't just be pressure on the stocks but operational pressure from the economy and falling spending as prices rise. That doesn't put these companies in a strong position at all, which is why I would stay away.
Cruise line companies need to answer how they're going to survive before investors should think that they can in any way thrive.
