It might be stretching the time frame a bit, but Royal Caribbean (NYSE:RCL) remains tethered to novel coronavirus headlines and recent action in RCL stock proves as much.
Conversely, Royal Caribbean and its cruise line peers are lower over the past month, a time frame in which the Centers for Disease Control and Prevention (CDC) said it will be mid-September at the earliest before cruise ships can set sail from domestic ports again. Previously, Royal Caribbean was hoping to hit the high seas on Aug. 1.
The CDC made that call in response to a resurgence in coronavirus cases across the U.S., including thousands of new cases in states with ports that serve as starting points for cruises, such as California and Florida.
Much to the chagrin of investors long cruise stocks, the CDC was undoubtedly right to make that call and there’s plenty of evidence to support that claim.
Petri Dishes on the High Seas
Over the course of the Covid-19 pandemic, cruise operators have accurately been lumped in with other travel and leisure offenders, namely airlines and casino companies. However, the three industries aren’t the same. About the only similarity is that patrons, in most cases, are choosing to board a plane or cruise ship or enter a gaming property.
The troubled faced by Royal Caribbean and its brethren is two-fold: imagery and statistics. No airline or casino operator was forced to hold guests at sea for 15 weeks due to the coronavirus, but that’s exactly what happened with the Costa Deliziosa, a ship operated by an Italian cruise firm.
That ship left port in January. It was April before it could return home despite, by some stroke of good fortune, not having any Covid-19 cases among its 1,814 passengers and nearly 900 crew.
The prospect of being stuck at sea for a few days longer than a trip is slated for is unappealing. Fifteen weeks is downright scary.
Then there’s the data/science. According to the CDC, passengers and crew share space more often than even urban settings. Even when ships are carrying only essential crew the CDC says it still sees transmission of Covid-19.
The agency added that between March 1 and July 10, there were nearly 3,000 instances of Covid-19 or similar cases aboard cruise ships and 34 fatalities. It’s a fact that airlines and casinos aren’t saddled with coronavirus death tallies that are that high.
For the privilege of embracing all those risks with Royal Caribbean, investors also take on a stock that trades at more than 60x earnings. That’s rich relative to a broader universe of consumer discretionary stocks and pricey compared to other non-cruise travel and leisure names.
The Bottom Line for RCL Stock
Investors looking for some good news may be heartened to know that Royal Caribbean and several of its rivals can likely survive until mid-2021 in a zero-revenue environment. That’s a fair amount of time and it gives Royal Caribbean opportunity to raise more capital, if needed, while potentially being responsive to positive economic and vaccine news.
The downside is RCL’s cost of accessing capital is increasing due to a flimsy credit rating and there are no assurances Covid-19 will cease spreading. In a recent note, Pete Trombetta, Moody’s lodging and cruise analyst, wrote:
“The review for downgrade will focus on Royal Caribbean’s recovery prospects in 2021 given the recent resurgence of coronavirus cases in certain states increasing the uncertainty around the reopening of the US and the company’s plans for the eventual return to service of its US operations, including what precautions will be put in place when sailings do resume and the associated incremental costs.”
For investors looking at travel equities correlated to Covid-19 developments, believe it or not, airlines and gaming companies may actually be safer than Royal Caribbean and its cruise competitors.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.