Stocks like Norwegian Cruise Line (NCLH), Royal Caribbean (RCL), Carnival (CCL) has made explosive gains in the last day. The cruising sector is getting hot again, is this a signal to buy?
Broadly speaking, these kinds of companies are representative of the health of the travel industry and of discretionary consumer spending, which have both been hit especially hard by the COVID-19 pandemic.
When people are afraid of getting sick on a cruise (or in a rental car on a vacation), that’s bad for business. When governments tell people to stay at home for months on end, that’s not great news for travel businesses, either. And when the Centers for Disease Control flat-out forbids cruises, that can put a company on the edge of bankruptcy.
And maybe that’s why on Wednesday, Morgan Stanley took advantage of some green days on the market to finally throw in the towel and downgrade Norwegian Cruise Line stock to underweight and reinstate its underweight position on Carnival. Just a few hours after that happened, Carnival subsidiary Princess announced that it is once again postponing its resumption of operations in several markets around the world to as late as mid-September, seemingly fulfilling Morgan Stanley’s prediction.
But what was the good news that apparently told investors today was the right time to buy travel stocks?
Yet another proxy for the travel industry are airline stocks. And today, American Airlines announced that its passenger traffic in May was up 71% from April. The airline also said it is increasing its domestic capacity in June to 25% of the year-ago level (after flying at 20% of capacity in May), and then growing that to 55% in July, in response to a “slow but steady rise in domestic demand.”
Viewed from one angle, that means that in July, American will still be flying only about half as often as it was before the coronavirus. But the airline appears to be forecasting a faster-than-expected recovery. And that bodes well not just for American and airlines as a whole, but also for travel stocks like Carnival, Norwegian Cruise Line, and Royal Caribbean.
Has the bottom for Cruise stocks like Norwegian Cruise Line (NCLH), Royal Caribbean (RCL) and Carnival (CCL) passed?
Have the country’s three largest cruise line stocks risen too high, too soon? One analyst seems to think so. Jamie Rollo at Morgan Stanley is downgrading shares of Norwegian Cruise Line this week. He’s also reinstating coverage of Royal Caribbean and Carnival. All three stocks were tagged with a bearish underweight rating on Wednesday morning, but even that wasn’t enough to send investors scurrying for the gangway. All three stocks moved higher on Wednesday.
Rollo thinks it’s time to sell into what was essentially an April rally for the three leading cruise lines. He feels the industry will be last form of travel to bounce back, a view that’s pretty much acknowledged as fact these days. Hotels are starting to open up. Airlines are starting to add flights. Cruise lines don’t have plans to start sailing until early August — and even that plan may fall apart.
The analyst sees negative earnings for the sector until 2023, and it’s going to be a bumpy next three years. There are still cruise ships out there with crew members who need to be repatriated, and most of that workforce will probably never want to set sail again. Rollo expects it will take about six months for the industry to rehire crews and reposition ships. This would place us closer to the end of the year for sustainable cruise levels, but 2021 will be challenging. The analyst is bracing for depressed revenue yields as a result of sluggish demand, travel uncertainty, and folks using the sweetened credits they got on 2020 cancellations.
Rollo’s downgrade of Norwegian Cruise Line from equal weight to underweight makes sense from his perspective. The stock is now 156% above its mid-March bottom, and the fundamentals seem to be left behind. His price target of $13 implies a 28% decline from Wednesday’s low.
It’s easy to wonder if the party is over. It’s easy to wonder if Rollo is right. But the news isn’t all bad. Time is seen as an enemy for Carnival, Royal Caribbean, and Norwegian Cruise Line given their cash-burn rates as they ride out the storm, but the clock is also an ally. Time will help folks forget about the unease they once felt about boarding a cruise ship amid a health crisis.
Florida’s governor announced on Wednesday that the state will enter the second phase of its aggressive reopening strategy, something that won’t necessarily sway an early end to the “no sail order” that’s keeping the cruise lines off the travel menu, but that will get folks in the home state of all three cruise lines to start considering vacations sooner rather than later. Florida’s stepped-up reopening efforts could help keep the recession in check near the most popular embarkation ports, and anything that speeds up the recovery process for the three cruise lines makes it less likely that we’re three years away from a return to profitability.
Should you buy into cruise stocks like Norwegian Cruise Line (NCLH), Royal Caribbean (RCL) and Carnival (CCL)?
Shares of these cruise stocks, overall, appear to be a very good investment option, with Wall Street analysts expecting its price to rise considerably in the next several years. The shares fell through support on fears of the coronavirus Covid-19 pandemic environment but the recent sell-off created an attractive opportunity to invest into this stock. The majority of the metrics point to this investment being highly attractive.
