There is good reason for investors in Carnival (CCL 0.43%) (CUK 0.63%), Royal Caribbean Cruises (RCL -0.26%), and Norwegian Cruise Lines (NCLH 0.83%) to have a sinking feeling about their stocks. COVID-19 was only just beginning to look like it was in the rearview mirror, and now we have a monkeypox outbreak on our hands.
The World Health Organization (WHO) says there are over 6,000 cases of the once-rare and sometimes deadly disease (80% of which are in Europe), while the U.S. Centers for Disease Control says there are over 600 confirmed cases in the U.S., mostly clustered in California and New York. While the WHO does not yet consider the outbreak a health crisis at the moment, the last thing cruise lines need is another global pandemic.
Image source: Getty Images.
Shares of the cruise operators aren't even treading water this year, having lost half of their value on average so far, but their stocks were already heading to Davy Jones' locker beforehand, with shares down an average of 63% over the past 12 months. They are also still dramatically below the level they traded at before the coronavirus pandemic struck.
Despite the storm clouds hanging over the industry, there may be rays of sunshine trying to break through. They could signal that the cruise line stocks are discounted enough that they are now buys. Let's see.
Image source: Getty Images.
Riding out the storm
The United Nations World Tourism Organization (UNWTO) called 2020 the "worst year in tourism history" as there were 1 billion fewer international arrivals, a decline of 74% from the prior year. In comparison, during the global economic crisis in 2009, there was a drop of just 4% in arrivals.
While many travel and tourism stocks rebounded last year as economies reopened and travel restrictions were lifted, the health of the industry was still impaired as arrivals only grew 4% from 2020. They are still 72% below pre-pandemic levels, or the equivalent of a $1.6 trillion economic contribution loss from 2019.
Yet the UNWTO's World Tourism Barometer suggests a rebound may be on the horizon as the first quarter enjoyed a 182% gain in international arrivals to 117 million versus 41 million in the year-ago period.
Moreover, 83% of the UNWTO's panel of experts are looking for 2022 to be "better" or "much better" as travelers spend around $1,400 per trip today versus the $1,000 per trip they spent in 2019.
Consumers want to head out to sea
Obviously, tourism is more than just cruises. But even the results from Carnival, Royal Caribbean, and Norwegian bear out the optimism expressed by the WTO.
Carnival reported last month that it had 74% of its fleet capacity in guest cruises in the second quarter, and at the end of June, it was up to 91%. Occupancy was also higher at 69% compared to 54% in the first quarter, and customer deposits increased by $1.4 billion to over $5 billion for the period. The cruise line also has $7.5 billion in liquidity available.
Meanwhile, Royal Caribbean is at 95% of capacity, and its bookings are 40% ahead of 2019's rate. Norwegian was able to report that all of its ships across all of its brands had resumed sailing, and its bookings are well ahead of its historical rates.
While Norwegian admits that one reason for the trend is because there is room on its cruise ships now that is typically not available, the cruise ship line is still seeing very strong demand for the 2023 and 2024 cruise seasons.
Avoiding the next rogue wave
There's little question that cruise ships have not made it to safe harbor yet. The war in Ukraine, for example, disrupted the flow of bookings as uncertainty arose, but they've since picked up the pace again.
That has resulted in the industry being significantly undervalued, trading well below its historical expected earnings rate, especially when compared to the lead-up to the pandemic. While there remain concerns about a recession, all three cruise lines are firm that their businesses are, if not recession-proof, at least recession-resilient. They also maintain they are better situated to weather any new storm than any of their land-based competition.
Carnival, Royal Caribbean, and Norwegian Cruise Lines have bounced well above the hole they fell into at the start of COVID, but as a group, they are still cheap. As their industry sees strong indications of recovery, investors may want to set sail with cruise line stocks once more.
