As of 11 a.m. ET, shares of Norwegian Cruise Line Holdings (NCLH 0.94%) are already down 4.8%, followed by Royal Caribbean (RCL 0.67%) with a 5.1% loss. Carnival Corporation (CCL 0.54%) (CUK 0.90%) is leading the whole sector lower -- down 7.4%.
Why is this happening? Well, as I pointed out yesterday, there wasn't really any good news supporting this week's two-day rally in cruise stocks to begin with. And it's only been a few days since Carnival reported its big $0.65-per-share loss, which hardly seems enough time for that sting to fade away. If what investors saw Monday and Tuesday was no more than the symptoms of short-sellers closing their short positions by buying back stock, it makes sense that the rally would end sooner rather than later, and that cruise stocks would be sinking once again -- the more so when you consider the near-term prospects for this industry.
Just yesterday, Cruise Industry News reported that cruise companies are preparing to spend $46 billion buying 72 new cruise ships with 160,000 berths for passengers over the next six years. In a market where cruise companies are already having to offer discounts to attract passengers, this poses two threats to cruise company profits.
First, while adding new cruise capacity would maximize profits in a strong-demand market, it could also force further price discounts to fill berths if demand is weak. And second, that $46 billion is going to have to come from somewhere.
It won't be coming from cruise company bank accounts, that's for sure. At last report, Carnival, Royal Caribbean, and Norwegian Cruise had barely $14 billion combined in cash on hand, and a lot of that cash is needed just to keep day-to-day operations solvent. Meanwhile, combined debt loads among the three big cruisers tip the scales at $73.1 billion -- and in a note out yesterday, Bank of America warned that "high leverage" is one of the "main risks" to cruise stocks currently.
Unless profitability returns to this industry quickly, and they are able to start paying down some of that debt, there seems a very good chance that by 2028 (that's as far out as Cruise Industry News' report goes), these companies could be lugging around in excess of $100 billion in combined debt.
Meanwhile, interest rates just keep going higher, raising the cost of servicing debt -- and pushing profitability farther and farther out of reach for Carnival, Royal Caribbean, and Norwegian. It all adds up to a lot of reasons for cruise investors to worry today -- and not a lot of reasons to buy cruise stocks.