Should Investors Be Looking At Cruise Stocks?

Major cruise lines have been forced to close down their operations thanks to the pandemic, with concerns that this could spell the end for the sector.

In the U.S., the Centers for Disease Control banned all cruise ships from docking at ports in the country for a 100-day period, starting in April. Major cruise companies have been forced to dock ships elsewhere, furlough employees, and try to maintain liquidity by any means necessary. 

Will the strong survive and thrive?

There is no doubt that a lot of cruise lines will struggle to survive this pandemic. Concerns about being stuck in the middle of an ocean during a pandemic when passengers are already infected with the virus will likely be imprinted on a lot of consumer’s minds for some time. 

The biggest cruise line company is Carnival (NYSE: CCL) and it is burning through $1 billion in cash each month during this pandemic, with Royal Caribbean (NYSE: RCL) burning through about $250 million each month. 

Everything from ship maintenance, docking fees, refunds, and customer service all still needs to be taken care of, which will be too much for some companies. However, the bigger cruise lines will likely absorb these costs and come out the other side of this situation. 

Carnival has accepted new capital from Saudi Arabia’s Sovereign Wealth Fund (which now holds an 8.2% stake in the cruise line) while others have been maxing out credit lines. While share prices have tanked, it looks like the biggest cruise lines have steadied themselves enough to (pardon the pun) stay afloat. 

How will cruises recover post-pandemic?

There are significant barriers that cruises will have to overcome post-pandemic. First and foremost, there will be extensive alterations needed to bring cruise ships up to date with the latest health and safety protocols. This could mean reduced capacities and a lot of entertainment facilities being affected.  

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Lots of casual customers may no longer want to go on a cruise as they might not see it as being a safe vacation option. Older people might be advised to avoid cruises until such a time that a vaccine has been found (if that ever happens). These customers may be put off due to the lack of proper medical care that would be available on the high seas. 

It seems almost certain that fire sales will be the way to get customers back on the cruise ships post-pandemic. Ultra-low fares will slash potential profit margins per customer, but it will be a cost of doing business once the cruises get back up and running. 

Cruise companies will need to give certain assurances regarding medical treatment onboard for passengers, which could mean dramatically improving medical facilities onboard and having all of the necessary personnel, equipment, and procedures that might be needed in the case of a virus outbreak.

What cruise lines might do the best?

Carnival looks to be the cruise line with the most potential. Its share price has recovered somewhat since initially dropping by 82% as the pandemic set in. News of a capital injection steadied the drop, with the price recovering by 85% since its mid-March low. 

If you take a long-term approach, a lot of investors will see potential in this company. It is a strong business at its core, serving 550 million customers in 2019, with this figure increasing significantly for a number of years. The company announced in early May that eight of its ships are resuming operations beginning August 1. Company CEO Arnold Donald has also said that 2021 bookings are strong despite the company’s “devastating” 2020. 

With a decent operating margin of 15.7% and a reopening plan in place, Carnival looks best-positioned to rebound in this sector.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.