The cruise-line stocks are grabbing headlines in the stock market again this week. This came after Royal Caribbean (RCL Stock Report) was seeking to raise another $1 billion to keep the company afloat during the coronavirus pandemic. Certainly not a good way to start the week, if you ask me. But well, what needs to be done has to be done, right? Following the announcement, fellow cruise operators Carnival (CCL Stock Report) and Norwegian Cruise Line Holdings (NCLH Stock Report) took a hit as well.
With cruises having been shut down for 6 months now, another two or three months could obviously hurt these cruise operators’ balance sheets significantly. The truth is, we know that the last two quarters will likely show little or no revenue at all. As painful as this financial difficulty will be, COVID-19 will pass, and humanity will get back to the old ways of living. Top cruise-line stocks are also known as epicenter stocks, and they are expected to surge higher in anticipation of a successful COVID-19 vaccine being developed. Should the coronavirus vaccine co-jointly developed by Pfizer (PFE Stock Report) and BioNTech (BNTX Stock Report) present positive data at the end of this month, we could expect these epicenter stocks to have another breakout.
Obviously, the cruise-line company that has the strongest balance sheet will weather through the storm. The industry saw a glimpse of hope when cruise booking continued to rise earlier last month, even for 2021. But the calls from the Centers for Disease Control and Prevention (CDC) for no-sail orders might have been giving investors sleepless nights. Should the health officials extend the no-sail orders into 2021, you would expect another plunge in these cruise-line stocks. But let’s hope it doesn’t happen.
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With the existing low valuations of the top cruise-line stocks, I would be lying if I say I’m not tempted to buy low to sell high. Yes, the companies are well-run and appear to have solid bookings for 2021. But hey, if a company is legally barred from doing its business. Maybe it’s time for us to take a deep breath before diving in straight away. If you decide to dive in, you have got to be really patient here. Because this won’t be a hit and run. If anything, these stocks are likely to cruise leisurely for some time. There will be the occasional waves, but I won’t bet on cruise line stocks forming any sustainable uptrends in the next few months.
As Jim Cramer puts it: “It’s still too soon to speculate in the cruise stocks. Their domestic ships won’t start sailing again until December at the earliest, and I think there’s a good chance that gets postponed again… Until they can safely set sail, there’s just not much that they can do; On the other hand, there’s always something that can go wrong.”
That said, perhaps you are still planning on buying one of the top cruise-line stocks today. That’s okay, since not all are created equal. Naturally, some of the biggest players could still be a smarter investment than the others.Why Carnival Cruises Could Be A Better Buy Among The Largest Cruise-Line Operators
We’re now seven months into the disruption, and no one can be sure when operations will resume as the Centers for Disease Control and Prevention extends a No Sail Order for cruise ships through October 31, 2020. This order continues to suspend passenger operations on cruise ships with the capacity to carry at least 250 passengers in waters subject to U.S. jurisdiction.
As the largest player in the industry, Carnival has certain bargaining power that others may not have. Since March, the company has raised $12.5 billion in financing. For its quarter ended August, it had $8.2 billion in cash and equivalents sitting on its balance sheet. In comparison, Norwegian Cruise Lines had a much lower amount of $2.3 billion in cash on its balance sheet at the end of June.Norwegian Cruise Line May Be Burning Lesser Cash, But It Also Has A Higher Leverage Ratio
Of course, comparing the cash balance of the two cruise companies is only part of the story. After all, Norwegian Cruise Line can operate on less money. Its cash burn target during this period is about $160 million a month. Assuming this number stays the same starting July 2020, the company’s cash balance can keep it afloat at least until the third quarter of 2021. In comparison, Carnival has a much higher cash burn rate of $530 million a month. But even then, its cash balance should be able to support the company until the end of 2021. With most expecting a slow recovery, liquidity matters, and Carnival appears to have a slight edge.
The big risk here for Norwegian is its debt level. As of June 30, 2020, the company’s total debt position was $10.3 billion. Meanwhile, the company’s cash and cash equivalents were $2.3 billion. In comparison, Carnival had a debt position of $20 billion and $8.2 billion in liquidity. In terms of debt ratios, both are not in particularly good shapes. However, the good thing is, both are seeing reservations for the second half of next year at the high end of their historical ranges. Of course, the real test awaits once the cruises are able to sail again.
The reality is, there remain so many unknowns. Even if we have an approved vaccine, it is unlikely that the cruising business will return to pre-pandemic levels immediately. Even if you are a betting man, how much would you be willing to bet on the cruise stocks? But if you have the risk appetite to stomach it, it is probably still best to put your money on the company with a higher chance of survival.
Royal Caribbean may be the first to bounce back, given the highest margins among its peers, at least historically. But Carnival will continue to be around as the largest player in the business. Norwegian seems like the laggard here. If you have to make a choice, it seems like Carnival is the safest one out there. The question is, will you decide to sail on CCL stock?