Royal Caribbean Stock- Is All The Good News Priced In? — Trefis
Royal Caribbean stock (NYSE: RCL) has rallied by almost 17% over last month, as the company expects to resume some of its most important cruises earlier than anticipated. This S&P 500, in comparison, has remained almost flat over the same period. Here’s a quick look at what’s been driving the rally, and what the outlook could be like for the stock.
Firstly, the company said that it would begin cruising to Alaska from July following the passage of the U.S. Alaska Tourism Restoration Act, which temporarily enables cruise ships to sail to Alaska, bypassing a legal requirement to make a stop at ports in Canada, which has banned cruses until 2022. Cruise companies had previously canceled their trips to Alaska, which is a very popular summer cruising destination. Separately, Royal Caribbean also intends to resume revenue-generating cruises out of Fort Lauderdale Florida from June 26, after its Celebrity Edge ship was approved by the Centers for Disease Control and Prevention to resume sailing. This is likely to be the first U.S. departing cruise since around April 2020 with paying passengers. For perspective, the company and investors were initially looking at a July restart. Moreover, the CDC also recently issued new guidelines easing mask-wearing requirements and social-distancing guidelines for fully vaccinated passengers on cruises. This could give potential cruise customers confidence that cruising is a relatively safe activity post-vaccination.
What about the longer-term picture for RCL stock? Although the recent developments are very positive, there’s probably a good reason for long-term investors to remain cautious about RCL stock. Royal Caribbean has been burning cash at a rate of about $300 million per month over Q1 2021, and this is likely to continue in the near term as operations are only expected to ramp up gradually through the rest of 2021. The company has also raised a lot of capital through the pandemic to stay afloat. Shares outstanding have increased by around 17% over the past year driven by equity raises, while debt load has soared to almost $21 billion, up from just about $11 billion at the end of 2019. The higher debt burden and interest costs are quite likely to weigh on Royal Caribbean’s profitability in the long run. The stock is now just about 30% below its pre-Covid highs, and we don’t think the risk-to-reward proposition looks too attractive for investors.
Our analysis on Royal Caribbean Stock Chances of Rise provides an overview of the stock’s recent performance and how it is likely to trend going forward.
Royal Caribbean stock (NYSE:RCL) has done reasonably well, rising by about 8% over the last five trading days and by around 12% year-to-date. Here’s a quick look at some of the recent developments for Royal Caribbean and what the outlook is like for the company.
Last week, the U.S. Centers for Disease Control and Prevention said that fully vaccinated people can stop wearing masks and social distancing outdoors and in most indoor settings. Although the new guidelines don’t refer to the cruising industry, it should increase confidence that things are getting back to normal following Covid-19. This should bode well for demand for recreational cruises, which are likely to resume from mid-July from U.S. ports. Separately, Pfizer’s Covid-19 vaccine received final approval for use in children aged 12 to 15. This could also prove positive for the cruising business, as there could be some revival in demand from families.
Now although the recovery over 2021 is likely to be somewhat slow for Royal Caribbean, as the company likely misses out on much of the lucrative summer cruising season, 2022 is looking much stronger, with consensus estimates pointing to sales of $10.1 billion. This is just slightly below the $10.9 billion in revenue the company posted in 2019. That said, profitability could be held back, given the company’s soaring debt load and interest expenses. At the end of March, Royal Caribbean had long-term debt standing at $20.7 billion, up from $12.2 billion last year, while its interest expenses were up almost 3x versus last year.
[4/5/2021] Royal Caribbean Stock Updates
Royal Caribbean stock (NYSE:RCL) has done fairly well this year, rising by about 24% year-to-date, although it has largely moved sideways in recent weeks. Here’s a quick look at some of the recent developments for RCL and what the outlook could be like for the company.
Firstly, the U.S. Centers for Disease Control has indicated that cruise ships could resume sailing from U.S. ports starting from mid-July, with the condition that 98% of crew and 95% of passengers on board are vaccinated. The cruise business in the U.S. has essentially remained shut since March 2020 and Royal Caribbean could see pent-up demand as cruises open up. For example, Royal Caribbean says that new bookings in March exceeded January and February levels by approximately 80%, despite limited sales and marketing activity, while also noting that average pricing was higher.  However, there are some factors that could hold back a full recovery. Voyages to Alaska, a key summer cruise destination, are likely to remain closed as the government of Canada has banned large cruise vessels from its waters until 2022. Moreover, children are not eligible for Covid-19 shots just yet and this could also limit demand to a certain extent from families.
Separately, Royal Caribbean also published its Q1 2021 results last week, reporting a quarterly loss of about $1.1 billion, on revenue of just $42 million as its fleet largely remained idle through the quarter. Monthly cash burn stood at approximately $300 million, an increase from the $270 million levels seen over Q4. While Royal Caribbean appears to have more than enough liquidity (over $5 billion in cash) to fund its cash burn until it resumes sailing in the coming months, its debt load has also soared, with long-term debt standing at $20.7 billion, up from $12.2 billion last year. This is likely to impact earnings in the long run, given that interest expenses were up 3x compared to last year.
See our analysis on Royal Caribbean Stock Chances of Rise for an overview of the stock’s recent performance and how it is likely to trend going forward.
[3/2/2021] Will Royal Caribbean Stock Continue To Trend Higher?
Royal Caribbean stock (NYSE: RCL) gained about 6% over the last five trading days, compared to the broader S&P 500 which gained about 1% over the same period. The stock has also outperformed year-to-date, rising by about 22% since early January, compared to gains of around 4% on the S&P. Although Royal Caribbean’s Q4 2020 results published last week remained tough, there are multiple trends driving the current gains. Firstly, the company says that it saw a 30% increase in new bookings since the beginning of 2021 when compared to November and December 2020. Bookings for the first half of next year are also within historical ranges, with average prices actually being higher, possibly due to pent-up demand. Secondly, Covid-19 cases in the United States, the company’s primary market, are also on the decline, with vaccines becoming more widely available. This has helped travel and leisure stocks to an extent, as investors expect business to pick up in the coming quarters. So is Royal Caribbean stock poised to rally further, or could it decline? RCL stock has a 54% chance of a rise next month (21 trading days) after rising 5.9% in the last five days, based on our machine learning analysis of trends in the stock price over the last five years. See our analysis Royal Caribbean Stock Chances of Rise for more details.
What about the longer-term picture for RCL stock, which remains down by over 30% from its pre-pandemic highs? While the recent developments are positive, there’s probably some reason for long-term investors to remain cautious. Royal Caribbean has been burning cash at a rate of about $270 million per month over Q4, and this is likely to continue in the near-term as operations are only likely to pick-up in a meaningful way later this year. Royal Caribbean had to raise capital over the pandemic to stay afloat and its debt load has soared to over $19 billion as of the end of December 2020, up from just about $11 billion at the end of 2019. The higher debt burden and interest costs are also likely to weigh on the company’s profitability over the long-run.
[1/7/2021] Will Royal Caribbean Stock Recover To $110 Levels?
Royal Caribbean (NYSE: RCL) stock has jumped by almost 25% over the last two months, as investors saw news surrounding the strong efficacy of Covid-19 vaccines and the commencement of dosing in the U.S. as a sign of the beginning of the end of the Covid-19 pandemic. The jump in the stock price is largely warranted, considering that Royal Caribbean and other cruise operators have been bearing the brunt of the pandemic. Royal Caribbean suspended cruises in mid-March 2020 and has been burning cash (over $250 million per month as of Q3 2020), as it continues to incur significant fixed costs related to maintaining its fleet of cruise ships. Now, are further gains in the cards for Royal Caribbean stock, which still remains down by about 40% from highs seen in February 2020 before the Covid crisis hit the markets?
We think it’s unlikely that it will reach the $110+ levels seen in February 2020 anytime soon for a couple of reasons. Royal Caribbean’s U.S cruises and most of its global cruises have been suspended at least till the end of February and some sailings have been pushed further into 2021. Additionally, the vaccine rollout in the U.S. is also not progressing as quickly as expected due to initial hiccups. A much more contagious strain of the coronavirus, which was first discovered in the UK, is now apparently spreading in the U.S. as well, causing concerns of a further surge. This potentially means that a return to normal could take longer than anticipated for cruise companies, resulting in further cash burn.
Even when Royal Caribbean eventually resumes its operations, it remains to be seen as to how quickly demand will pick up. More importantly, the company’s longer-term profitability remains a concern. Royal Caribbean has doubled down on its borrowings (long-term debt more than doubled from $8.4 billion in Q3 2019 to about $17.6 billion in Q3 2020) through the pandemic to fund its cash burn, and this will lead to higher interest costs, which is likely to continue to impact profitability down the road. The company’s recent stock sale and the related dilution is also likely to limit per-share earnings. We compare Royal Caribbean’s stock performance during the Covid-19 crisis with that during the 2008 recession in our interactive dashboard.
[10/26/2020] How Much Could RCL Stock Rise Post Covid-19
There could be an upside of over 80% for Royal Caribbean Cruises (NYSE: RCL) stock if its business recovers strongly post the Covid-19 pandemic. The stock trades at about $65 currently and has lost about 50% of its value year-to-date, as Covid-19 essentially brought the company’s business to a standstill. The stock traded at about $118 per share in February, as the markets peaked pre-Covid, and is about 45% below that level presently. That said, the stock has more than doubled from lows seen in March 2020, driven by its progress in shoring up its liquidity and the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market, in general, recover to a large extent.
RCL stock has significantly underperformed the broader markets year-to-date, as investors remain cautious about the prospects of cruiseliners. The U.S. CDC has indicated that cruise passengers are at increased risk of the person-to-person spread of infectious diseases, recommending that travelers defer all cruise travel. Cruiseliners from the U.S. have not sailed for the last seven months or so, and RCL is unlikely to resume the U.S. cruises until at least December. However, as the pandemic subsides, the company is likely to see demand rebound back fairly quickly. There are some indicators that customers could take to cruising fairly quickly once the health crisis subsides. For instance, in August, the company indicated that it was seeing a surge in bookings for the second half of 2021, despite very limited marketing.
Our conclusion on the company’s upside potential is based on our detailed analysis comparing Royal Caribbean’s stock performance during the current crisis with that during the 2008 recession an interactive dashboard analysis.
2020 Coronavirus Crisis
- 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 S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid a Saudi-led price war
- From 3/24/2020: S&P 500 recovers 55% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in the 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 the S&P 500 index
- 1/1/2010: Initial recovery to levels before the 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 In Recent Years Looked Good, But Current Situation Is Very Challenging
Royal Caribbean’s revenues rose from about $8.5 billion in 2016 to about $11 billion in 2019, as demand for cruises rose. The company’s earnings also grew sharply over the period, rising from around $6 per share to about $9 per share. However, the picture has changed drastically for the company over 2020. Over Q2 2020, Royal Caribbean’s Revenue saw an unprecedented 93% decline compared to the same period a year ago. Full-year sales for 2020 are likely to fall by over 70% and it’s very likely that it could take over a year for Revenues to return to pre-Covid levels, assuming that there are no major changes in consumer behavior post the pandemic.
Does RCL Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
Royal Caribbean’s total debt has increased from $8.1 billion in 2016 to almost $19 billion at the end of Q2 2020, while its total cash increased from about $130 million to $4.2 billion over the same period, as the company raised funding to tide over the crisis. Further in October, RCL indicated that it would raise another $1 billion in new capital, part of which would come via senior convertible notes. While the company’s cash flows from operations grew from $2.5 billion in 2016 to $3.7 billion in 2019, with operations largely suspended, the company is currently burning through an excess of $250 million a month. While the company’s cash cushion appears relatively comfortable at present, if it doesn’t set sailing by next Summer with occupancy levels picking up, things could get tough.
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
- July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand and progress with vaccine development buoy market sentiment.
Keeping in mind the trajectory over 2009-10, this suggests a potential recovery of over 80% once the pandemic ends via the deployment of a safe and effective vaccine or via herd immunity, and customers are more confident about taking cruises. This would make a full recovery to levels of close to $120 that Royal Caribbean stock was at in February before the coronavirus outbreak gained global momentum.
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