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Bear of the Day: Royal Caribbean (RCL)

Benjamin Rains
·4 mins read

The coronavirus brought the travel and leisure industry to as near a dead stop as many previously thought possible. The pandemic hit bars, non-essential stores, airlines, and others hard. But many businesses that were ravaged by the lockdowns and social distancing orders have returned to something close to normal as economies around the world learn to live with the pandemic.

For instance, airline travel never stopped and people have slowly returned to the skies. Meanwhile, Royal Caribbean’s (RCL) outlook appears far more turbulent, as rough conditions remain for the global cruise firm.

Far from Smooth Sailing Ahead…

RCL is a travel industry titan that operates under four brands, which include its namesake Royal Caribbean International, Celebrity Cruises, and more. Yet, the confined quarters and almost nearly complete recreational aspect of the cruise industry make it very difficult to operate during the pandemic.

Royal Caribbean’s first quarter revenue fell 17%, which looks fantastic compared to its second quarter results that it reported on August 10. RCL’s Q2 revenue tumbled 94% from $2.8 billion in the year-ago period to $175 million. The company also swung from adjusted earnings of $2.54 per share in Q2 FY19 to a loss of -$6.13, which also fell well short of our Zacks estimate.

The circumstances, which are clearly out of Royal Caribbean’s control, have forced it to issue more debt to help it navigate the uncertainty. Unfortunately, the cruise industry still doesn’t know when they will be able to return to anything close to regular operations, as their business is one of the least suited for the coronavirus.

 

 

 

 

 

 

 

 

 

 

 

 

RCL’s operations remain completely suspended until the end of October, “with two exceptions: One of them is the China operations and also Australia.” Still, CEO Richard Fain said on the company’s Q2 earnings call on August 10 that while it “may well be possible that we'll resume operations in China and potentially Australia before the end of October, but it's uncertain. And I'm not making any statements that that's going to happen.”

Even though consumers are booking trips for next year, particularly “for the summer and back half of 2021, "the overall timeline remains largely unknown. “We will not rush to return to service until we are confident that we have figured out the changes that we must make to offer our guests and crew strong health and safety protocols with the enjoyable experience that they rightly expect,” RCL’s chief executive told analysts.

Bottom Line

Royal Caribbean stock wasn’t cruising along even before the pandemic hit. In fact, RCL shares moved mostly sideways for over two years until they fell in February. The stock is also still down 50% in 2020, despite its roughly 130% climb off the market’s March lows.

Royal Caribbean did jump again on Monday, on the back of positive news on the coronavirus treatment front. And some investors might want to take a chance on RCL stock, given that it has plenty of room left to climb before it hit its early June levels, not to mention its January highs of $135 per share.

However, the uncertainty of when travelers will return to cruise ships makes it a speculative-style bet. Royal Caribbean’s earnings outlook is dismal and its revisions have moved heavily in the wrong direction, which helps RCL hold a Zacks Rank #5 (Strong Sell) at the moment. Plus, our estimates call for the firm’s sales to plummet by roughly 95% in both the third and fourth quarter.

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