Very few industries suffered during the novel coronavirus pandemic quite like the cruise ship industry. It was even worse for Carnival (NYSE:CCL). At one point, the company’s Diamond Princess was the face of Covid-19, which saw the disease-stricken ship quarantined off the coast of Japan. Not surprisingly, CCL stock took a punishing blow throughout most of March.
But as I mentioned multiple times during this crisis, outbreaks have a relatively short impact. At some point, people get tired of mitigation efforts, eventually moving on with their lives. And that’s exactly what happened with the coronavirus. From late April/early May, states began reopening their doors for business. More joined in, resulting in the positive May jobs report.
However, as this was going on, I urged my readers to be cautious about CCL stock. Although it could one day become a clear buy, that wasn’t going to happen in the immediate term. This past Thursday’s sharp market correction proved this point.
Fast becoming a thorn in the Trump administration’s side, Federal Reserve Chair Jerome Powell sent out a sobering warning during a press conference on Wednesday. In it, Powell stated that the economy faces “a long road” to recovery. Further, he urged Congress that it was too early to pull back support for the millions who are unemployed.
Adding confirmation, the most recent weekly initial jobless claims came in at 1.5 million. While the unemployment benefits backlog is among the tally, so are higher-paying white-collar occupations. It demonstrates that the consumer economy still faces challenges.
Again, I still believe that we’ll make a credible comeback. But for now, uniquely ugly headwinds make CCL stock too risky.
The Numbers Are Not Favorable to CCL Stock
Obviously, a major impediment to Carnival stock is the black eye that the underlying industry suffered. It isn’t just the concept that cruise ships are giant floating Petri dishes. During this crisis, we saw countless thousands of global cruise passengers stranded at sea as governments worried about spreading infections.
Thus, the floating Petri dish also became a prison. That’s going to be a hard image for Carnival to cast aside. Also, it’s no different for Carnival’s rivals, such as Royal Caribbean Cruises (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH). Naturally, people want to enjoy themselves during their vacations. With cruises earlier this year, they’ve been getting more than they bargained for.
Critically, this industry already had a shady side prior to the pandemic. A particularly problematic issue is that cruise ships are registered in countries with open registries. As the Saturday Evening Post explains, these nations “essentially have no minimum wages, labor standards, corporate taxes, or environmental regulations.”
During bull markets, such a setup is advantageous for CCL stock. Basically, Carnival can maximize its profitability as the global cruise industry recovered from the Great Recession. But with the coronavirus pandemic, the math simply does not work.
From 2009 through 2019, an average of 23.2 million passengers boarded cruise ships worldwide. During this period, Carnival’s operating margin averaged 14.8%. In 2019, 30 million passengers enjoyed cruises globally, while Carnival’s operating margin hit 15.73%.
Of course, everything will change in 2020. But by how much? If we look at airline passenger volume, we see that recent capacity is below 20% that of the year-ago level. A similar capacity drain in the cruise liner industry could see Carnival’s operating margin sink below 4% based on historical trends.
This would simply not be sustainable for CCL stock.
Demographics Are Also Concerning for Carnival
If that wasn’t enough to dissuade you from Carnival at this moment, consider the typical age of cruise ship passengers. As you might suspect, the median age is the 60 to 69 years range. And that flies right into the “perfect” demographic for serious Covid-19 infections.
Like I mentioned earlier, this is another hurdle that the industry must overcome. While I don’t doubt that it eventually will, that time isn’t now.
Finally, I don’t think it’s helpful to compare cruise ships with the airline industry. The latter is a multivariate transportation platform. That’s a fancy way of saying that people fly for either personal or business reasons.
On the other hand, cruise ships are exclusively for vacationing. Currently, that’s just not the highest priority for most folks. I also suspect that many would-be passengers are doing a cost-benefit analysis that will likely result in an unfavorable equation for CCL stock.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.