What happened
Well, so much for that trend I was talking about! After four straight sessions of gains, cruise line stocks are sinking today. The broad move lower follows the announcement from industry bellwether Carnival Corporation (CCL 2.58%) that it needs to raise $1 billion in new cash through a stock offering.
As of 11:30 a.m. ET, shares of Norwegian Cruise Line Holdings (NCLH 2.22%) and Royal Caribbean (RCL 1.66%) were down 8.5% and 9.3%, respectively. And Carnival stock itself -- the company that caused the plunge -- led the pack lower with an 11.9% loss.
So what
So how bad is this news, exactly? Let's set the stage.
Nearly one month ago, Carnival reported its fiscal Q2 2022 earnings results. Although cash flow turned positive in the second quarter and revenue grew 50% sequentially, Carnival booked a $1.8 billion loss for the quarter and negative free cash flow of $488 million.
Make no mistake: This was still a big improvement from results in recent quarters, and certainly better than the numbers Carnival was forced to report during the worst part of the pandemic. Nevertheless, Carnival warned investors in no uncertain terms that it will remain unprofitable at least through Q3 2022 (and Wall Street thinks through Q2 2023).
With this prospect in mind, Carnival has decided that no matter its preferences, it simply must have more cash to get it through the lean times. Accordingly, management announced last night that it will sell at least $1 billion in new stock, and perhaps as much as $1.15 billion. And it will use the cash raised through this offering for "general corporate purposes," which may include paying off some debt.
Now what
That's the bad news. Now here's the worse news:
Carnival had to take a significant haircut to its stock market price to move so many shares, so fast. Late last night, it announced that the best price it could get for the new shares -- perhaps as many as 117.4 million of them, enough to dilute existing shareholders by 8.5% -- was just $9.95 apiece. Investors quickly responded by selling Carnival stock down to that price, and even a bit below it.
Wall Street sounded the alarm bell, too, with investment bank Stifel Nicolaus warning today that a sell-off is "coming for sure" and predicting "panic ... across the investment community," reports TheFly.com. And indeed, that's just what we're seeing here today.
Remember: This isn't just a story about Carnival, which warned of a loss in one more quarter and thus sparked investment banker predictions that the company will actually lose money for three more quarters. This is also a story about Royal Caribbean and Norwegian Cruise, which are largely in the same boat as Carnival (pardon the pun) from a too-much-debt perspective.
As with Carnival, analysts are still predicting that both Royal Caribbean and Norwegian Cruise will turn profitable next quarter. If, however, these two companies announce bad news similar to what Carnival reported last month, then you can expect those predictions to evaporate, and for their stock prices to suffer just as much as Carnival's already has.
We'll soon know if this disaster scenario will happen. Royal Caribbean reports its Q2 results on Aug. 2. Norwegian Cruise reports on Aug. 4. If you own either of these stocks, the time to batten down the hatches is now.
