Shares of cruise line stocks jumped on Tuesday as there was good news out of the industry and the market speculated the worst of inflation may be behind us.
Shares of Carnival (CCL 1.46%) jumped as much as 7.9%, Royal Caribbean (RCL 1.90%) was up 7.3%, and Norwegian Cruise Line (NCLH 0.07%) jumped 6%. Shares of the stocks are up 7.6%, 6.1%, and 4.4%, respectively, at 2 p.m. ET.
The industry-specific news was the Centers for Disease Control and Prevention (CDC) ending a program to track COVID-19 cases on cruise ships. Regulators said there's still some risk, but companies can manage their own risk.
This seems to be a turning point in how the CDC is treating COVID-19 and its variants for travel. Masks are no longer required on airplanes, and now reporting of cases isn't even necessary for cruises. Maybe this is a catalyst these businesses need to continue a recovery.
The stock market is also up on Tuesday on relatively solid earnings reports early in earnings season. Johnson & Johnson beat estimates and so did IBM, although the latter reduced free cash flow estimates for the year. Investors are searching for any sign of consumer spending trends or earnings indications, and so far the news has been reasonably good.
Most of the earnings reports and market reaction have been related to big conglomerates or banks, so we're not getting a great indication of consumer spending patterns yet. The fear is that inflation will cause consumers to cut back on discretionary purchases, like cruises, although that fear hasn't really proven out at this point.
While cruise line stocks may be up today, the challenge for them has always been getting back to breakeven. You can see below that all three companies took on a tremendous amount of debt during the pandemic and still don't have positive operating cash flow to pay off debt.
It would take more than a return to pre-pandemic demand levels to get to profitability, and I don't think we'll see that anytime soon. It'll take a lot more than just fewer COVID-19 cases being reported to get back to normal operations.
The pop in shares today is great, but keep in mind that investors may still face some disappointment from cruise line stocks. They'll likely need to raise money to pay down debt, which could dilute shareholders, unless they can get back to profitability. It's been the same story for more than two years now, but cash flow doesn't seem to be getting any better.