Is The Surge In Royal Caribbean Stock Warranted?


Royal Caribbean stock (NYSE: RCL), the second-largest cruise line operator, has fared rather well recently, rising by almost 16% over the last month, compared to the broader S&P 500 which has gained just about 2% over the same period. The recent rally has come despite U.S. daily Covid-19 cases soaring to levels of over 800,000 amid the spread of the highly infectious omicron virus variant. The cruising industry has been particularly badly hit by the current surge, with cruise ships seeing a 30-fold increase in Covid-19 infections over two weeks, per the U.S. CDC, forcing Royal Caribbean to suspend certain cruises.

However, investors are apparently looking beyond the current surge. For perspective, RCL indicated that in late December 2021 it carried around 1.1 million guests since it resumed service in June 2020, with just 1,745 people testing positive for Covid-19, translating into a positivity rate of under 0.2%. With the wider availability of vaccines, emerging therapeutic options, and new variants such as omicron apparently being less severe, investors are likely betting that things will gradually get back to normal for the cruising industry, with the summer of 2022 likely to come in particularly strong due to pent up demand. The company expects to generate positive cash flow by this spring and indicated that it should be profitable for the full year of 2022. Moreover, with Royal Caribbean stock trading at about 30% below pre-Covid levels seen in February 2020, investors might be seeing some value, given that Royal Caribbean is likely to see 2022 revenue rise to around 90% of 2019 (pre-Covid) levels per consensus estimates.

That being said, there are risks as well. RCL’s high leverage remains a concern, with its total debt load rising from around $8.4 billion in 2019 to almost $21 billion currently. This could limit the company’s ability to drive shareholder returns in the medium to long term. Our analysis on  Royal Caribbean Upside Post Covid compares Carnival stock’s performance over the 2008 financial crisis versus the Covid-19 crisis. For details about CCL revenues and comparison to peers, see Carnival Revenue Comparison.

Below you’ll find our previous coverage of Royal Caribbean stock where you can track our view over time.

[12/10/2021]Royal Caribbean Stock Remains 36% Below Pre-Covid Levels. Should You Buy?

Royal Caribbean stock (NYSE: RCL), the second-largest cruise line operator, has seen its stock trail the market this year rising by just about 7% year-to-date, compared to the S&P 500 which remains up by around 27%. While the company resumed its cruises in June after over a year of essentially being shut down, the recovery has been limited somewhat by a surge in the U.S. Covid cases through the summer and recent concerns surrounding the apparently more infectious new omicron strain of the coronavirus.

That said, there have been some positive developments for the stock, as well. Firstly, demand for the next year appears to be solid, with the company noting that bookings for next summer were trending at historically strong levels, and the company noted that it could turn profitable again by the end of next year. Royal Caribbean International also expects all 26 of its cruise ships to be back in service by spring 2022. Moreover, on Wednesday, Pfizer indicated that the third dose of its Covid-19 vaccine would be effective at neutralizing the omicron variant and this should also prove positive for the cruising industry in general.

Now, RCL’s stock price remains down by about 36% from pre-Covid-19 levels, compared to the broader S&P 500 which has actually gained about 39% from its pre-Covid highs. With demand poised to recover and the stock price remains depressed, is there an opportunity here for investors? We think there is, although there are some risks as well. Covid-19 is proving harder to contain than initially expected and it’s quite likely that Covid-19 cases will rise and fall seasonally, and the cruising industry remains particularly vulnerable, given that it involves keeping people together in semi-confined spaces for days. Moreover, RCL’s high leverage also remains a concern, with its total debt load rising from around $8.4 billion in 2019 to almost $20 billion presently.

While RCL stock has seen lower levels during the current Covid-19 crisis, how did it fare in the 2008 crisis? Our analysis on RCL Upside Post Covid compares RCL’s performance over the 2008 financial crisis versus the Covid-19 crisis.

[12/1/2021] What’s Next For Royal Caribbean Stock Amid Renewed Covid Fears?

Royal Caribbean stock (NYSE: RCL), the second-largest cruise line operator, has declined by about 12% over the last week (five trading days), compared to the broader S&P 500, which has declined by about 2.6% over the same period. The sell-off follows the discovery of a highly mutated and apparently more transmissible new strain of the novel coronavirus, dubbed Omicron, which is prompting fears of renewed lockdowns and travel restrictions. The virus could pose a higher risk of re-infection compared to the Delta variant of the virus, which is currently the dominant strain worldwide, and it’s also not yet clear whether the current crop of Covid-19 vaccines will be as effective against the variant. If this virus strain drives another Covid wave or shows signs of evading vaccines, it could prove to be a meaningful headwind for Royal Caribbean and the broader cruising industry, which is only slowly getting back to normalcy after over a year of being essentially shut. That said, RCL stock still remains down by almost 50% from its pre-Covid highs and down by about 2% year-to-date, meaning that the risk is probably priced in.

Now, is RCL stock set to decline further or will it rise in the near-term? We believe that there is a decent 70% chance of a rise in Royal Caribbean stock over the next month (21 trading days) based on our machine learning analysis of trends in the stock price over the last ten years. See our analysis on Royal Caribbean Stock Chance of Rise.

Five Days: RCL -12%, vs. S&P 500 -2.6%; Underperformed market

(2% event probability)

  • Royal Caribbean stock declined 12% over a five-day trading period ending 11/30/2021, compared to the broader market (S&P500) which fell by about 2.6% over the same period.
  • A change of -12% or more over five trading days has a 2% event probability, which has occurred 58 times out of 2,515 in the last ten years.

Ten Days: RCL -18%, vs. S&P 500 -2.5%; Underperformed market

(1% event probability)

  • Royal Caribbean stock declined 18% over the last ten trading days (two weeks), compared to the broader market (S&P500) which fell by -2.5%.
  • A change of -18% or more over ten trading days has a 1% event probability, which has occurred 35 times out of 2,515 in the last ten years.

Twenty-One Days: RCL -17%, vs. S&P 500 -0.8%; Underperformed market

(3% event probability)

  • Royal Caribbean stock declined 17% over the last twenty-one trading days (about one month), compared to the broader market (S&P500) which fell by -0.8%.
  • A change of -17% or more over twenty-one trading days has an 3% event probability, which has occurred 73 times out of 2,515 in the last ten years.

While RCL stock has seen lower levels during the current Covid-19 crisis, how did it fare in the 2008 crisis? Our analysis on RCL 2008 vs Now compares RCL’s performance over the 2008 financial crisis versus the Covid-19 crisis.

[10/25/2021] Up Over 3x From Covid Lows, Is Royal Caribbean Stock Still A Buy?

Royal Caribbean stock (NYSE: RCL), the second-largest cruise line operator, has seen its stock largely move sideways in recent weeks, although it remains down by about 4% over the past month, compared to the broader S&P 500, which gained about 2% over the same period. Things are slowing, but surely looking up for the leisure cruising industry, which bore the brunt of the Covid-19 pandemic. Royal Caribbean resumed sailing from U.S. ports in late June and has indicated its entire fleet of 26 ships will be back in service by early 2022. Ticket pricing is also poised to look up, driven by higher vaccination rates and pent-up demand for cruising, and it’s likely that bookings for 2022 could approach or exceed 2019 levels. Covid-19 infections in the U.S. have also been trending steadily lower, after seeing a big surge through the summer, boding well for cruising stocks.

So is Royal Caribbean stock a buy at current levels?  While the industry is likely to see a strong recovery in the coming months, we think this is largely priced into RCL stock, which has rallied by over 200% from the low of $28 seen in March 2020. In fact, the stock now trades near $85 presently, marking a discount of just about 28% from its pre-Covid highs. However, investors need to account for higher levels of risk versus pre-Covid levels, given the company’s total debt has increased from roughly $6.4 billion in 2017 to close to $20 billion currently. The company is also seeing higher interest costs and this could weigh on profitability. Moreover, with a 100% containment of Covid-19 looking unlikely and new mutations of the virus remaining a threat, there could be some revenue risk for cruise line operators in the medium term.

While RCL stock has seen lower levels during the current Covid-19 crisis, how did it fare in the 2008 crisis? Our analysis on RCL 2008 vs Now compares RCL’s performance over the 2008 financial crisis versus the Covid-19 crisis.

[8/24/2021] Is Royal Caribbean Stock A Buy At $80?

We believe that Royal Caribbean stock (NYSE: RCL), the second-largest cruise line operator, looks like a reasonably good buying opportunity at current levels. RCL stock trades near $80 presently and it is, in fact, down 40% from its pre-Covid levels of around $134 per share at the end of 2020 – before the coronavirus pandemic hit the world. The stock recovered meaningfully over the first few months of this year, as growing vaccination rates and the plans to resume sailing caused investors to get more optimistic about Royal Caribbean’s prospects. However, the stock declined by almost 15% since early June 2021 as the spread of the highly infectious Delta variant of the Coronavirus and the recent surge in U.S. infections have hurt the near-term outlook for the cruising industry. But now that the stock has corrected to accommodate the slower than expected near-term recovery, we believe that RCL stock looks quite attractive at the current levels of around $80 per share.

While RCL stock has seen lower levels during the current Covid-19 crisis, how did it fare in the 2008 crisis? Our analysis on RCL 2008 vs Now compares RCL’s performance over the 2008 financial crisis versus the Covid-19 crisis. Parts of the analysis are summarized below.

Timeline of Coronovirus Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps the S&P 500 reach a record high.
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 97from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
  • 8/19/2021: Around 60% of the U.S. population has received at least one dose of the Covid-19 vaccine, while 51% of the population is fully vaccinated.

In contrast, here is how RCL stock and the broader market fared during the 2007-08 crisis.


Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Royal Caribbean vs S&P 500 Performance Over 2007-08 Financial Crisis

RCL stock declined from levels of around $40 in October 2007 (the pre-crisis peak) to roughly $6 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 85% of its value from its approximate pre-crisis peak. This marked a significantly higher drop than the broader S&P, which fell by about 51%. However, RCL recovered strongly post the 2008 crisis to about $26 by the end of 2009 rising by 320% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

RCL Fundamentals Were Strong Until Covid-19 Hit

Royal Caribbean’s revenues rose fairly consistently from $8.8 billion in 2017 to about $11 billion in 2019, as demand for cruises increased. The company’s earnings also grew over the period, rising from $7.57  per share to about $8.97 per share. However, the picture changed dramatically over 2020 due to the Covid-19 crisis, as revenues dropped to just $2.2 billion, with the company posting a loss of about $27 per share over the year. Although the company resumed sailing from U.S. ports in late June 2021, after almost 15 months of inactivity, revenues are still expected to decline further in FY’21 to under $2 billion, per consensus estimates, as the spread of the more infectious Delta variant of the virus likely causes some customers to hold back on cruising due to the recent resurgence of U.S. Covid cases.

Does RCL Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Royal Caribbean’s total debt has increased from roughly $6.4 billion in 2017 to about $18 billion as of 2020, while its total cash increased from roughly $100 million to over $4.3 billion over the same period, as the company has raised funding to tide over the crisis.  The company burned about $3.7 billion in 2020 as operations were suspended through much of the year and monthly cash burn over the second quarter of 2021 stood at about $330 million. Although the cash burn rate is high, Royal Caribbean’s adequate cash cushion should be sufficient to keep it going over the next several quarters, even if demand remains muted. That said, higher interest costs could weigh on profitability through the post-Covid recovery period. 

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally.
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment. Multiple countries have undertaken large-scale vaccine programs for Covid-19, though new variants of coronavirus resulted in an uptick inactive cases.

Overall, we believe that RCL stock is likely to see higher levels going forward. While FY’21 is also likely to remain a tough year for the company, 2022 is looking better. Although Covid-19 could linger, cruise line companies (and their passengers) will likely adapt to the new normal, potentially requiring vaccines for passengers and staff, submissions of a negative coronavirus test, and mask-wearing in indoor spaces. Royal Caribbean, along with its major rivals Carnival and Norwegian Cruise Line, has signaled robust demand for 2022, even factoring in higher prices for cruises. Consensus estimates point to sales of over $10 billion for 2022, approaching pre-Covid levels. With RCL stock remaining down by about 40% since late 2019, and demand slated to pick up, the risk to reward tradeoff for the stock is looking more compelling, in our view.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

 Returns Jan 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 RCL Return 9% 9% 3%
 S&P 500 Return -2% -2% 108%
 Trefis MS Portfolio Return -7% -7% 264%

[1] Month-to-date and year-to-date as of 1/18/2022
[2] Cumulative total returns since the end of 2016

 

Trefis
Market Beating Portfolios
Trefis 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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