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Cruise lines: 'The protocols are working' to mitigate coronavirus transmission, analyst says

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Morningstar Senior Equity Analyst Jaime Katz joins Yahoo Finance Live to talk about major cruise lines' policies for handling COVID positive passengers and how their effectiveness may signal a future return to cash flow.

Video Transcript

- As we've been tracking the latest on the omicron variant, of course, that hangs pretty important for some of the major cruise lines looking to get back to normal. They had seen quite a bit of a rebound over the last few days, and some of that rally waning a bit in this session. But for more on the opportunity there, I want to bring into the show Jaime Katz, Morningstar senior equity analyst joins us right now.

And Jaime, appreciate you taking the time. I mean, we were having this debate earlier today. You know, when we're talking about omicron and what that looks like, even if you might not, you know, have some of these outcomes leading to deaths, you know, knock on wood, if all the vaccines hold up, still not great if you're still getting sick on some cruises. So what is it looking like in terms of early bounceback in demand and what cruise lines have been hoping for?

JAIME KATZ: Yeah, well, I'm suspecting that this is going to look a little bit like delta, but maybe somewhat better, which gave cruisers some concern initially, but then what happened was the demand really bounced back when they saw that this was a pretty fast variant going through society, and that these protocols were put in place to make sure that, if you were on the ship, it didn't spread. And as, you know, we had chatted earlier, but I think it's important to point out that, relative to a land-based vacation, the positivity rates that you're seeing on these ships-- there was just a Norwegian ship that docked back in New Orleans this week-- there were 17 positive cases, last I saw, out of 3,200.

And when you think about that positivity rate relative to sort of the national positivity rate, and if you look state by state, it's actually significantly better than what we're doing on land here. So I think the protocols are working, and that's giving consumers some assurance that some of these risks are being mitigated as well as possible. And that is allowing for demand to stay decent for cruising next year.

- Yeah, I guess when it comes to demand staying decent versus getting back to good, that's the big question investors have top of mind for whether or not these are good stocks to invest in. And when you look at maybe the forecast there and dig into the fundamentals, obviously they didn't have a lot of income coming in for a long time here. Lasted a lot longer than even their own projections may have pointed to. So I mean, when you look at that and the debt burden for some of these companies, is it starting to get closer to where maybe you could say these might be more positive equities to maybe consider?

JAIME KATZ: Yeah, I think for sure in the spring we're going to start to see more of these businesses turn cash flow positive. And you know, we will note that the fleet, which is still ramping, is set to be fully deployed by the spring for all of the three major cruise lines-- Royal, Carnival, Norwegian. So there's going to be more visibility as to what capacity constraints are there, how they've-- how they've allayed fears with the COVID virus.

And that will give consumers more assurances that this is a safe place to be. And so I think from the commentary and the rhetoric that we're hearing, it's really that demand and pricing picks up sort of closer to the back half of next year, rather than in the front half of 2022, when there's still a little bit of uncertainty and there's still more consumers that have to get vaccinated to be on these ships.

- When you look at fair value, too, though, obviously, here it's been difficult to kind of consider what's been going on with the delta variant, then omicron now, too, but when you look at maybe how some of these companies went different routes to kind of, I guess, put them-- put themselves in better positions on the other side, whatever the other side came, when you kind of separate out, you know, all of the major cruise lines here, which one, to you, looks best positioned to really get up and go if the spigot gets turned back on?

JAIME KATZ: Yeah, I think right now, from our vantage point, Carnival and Norwegian are the most undervalued. I think Carnival has a pretty interesting opportunity to come out of this period with EBITDA margins that are significantly better than they have been in the past. And part of that is because they have pruned a lot of the underperforming ships in the fleet.

And so I think we're going to see better returns out of them going forward from a profitability perspective relative to prior profitability. And I think we will see travelers start to really pile back into these-- these opportunities as kids are vaccinated. And we'll start to see the real pricing power into the back half of next year.

- I guess one thing that kind of-- you know, we've been tracking the airline rebound. And obviously, that's a little bit easier in terms of, you know, holiday travel and everything else, where people need to get around. It's a bit of more of a inelastic piece of the pie, I guess.

But when you look at leisure travel, that's been what's hyping and helping travel get back to where it is. Business travel, not the case. Not sure there's a lot of business travel in the cruise line industry, but when you look at maybe how the consumer might be, you know, really willing to snap back into cruises, if you are a cruise fan out there, I mean, what have kind of your, I guess, surveys or any sort of data indicated in terms of maybe some of how bad cruise fans really do want to get back on ships?

JAIME KATZ: Well, I think, you know, leisure has definitely led the way, and business has definitely lagged, from a travel perspective, coming out of this. And we see this in the hotel [INAUDIBLE] data, too. And so there have been brands like Wyndham that are really more focused on those drive-to consumers that have outperformed, you know, relative to something like an IHG, which is more business. So I do think there has been a fair amount of savings. People have put traveling on the back burner.

And now, it's time to sort of revert spending closer to historical allocation of wallet. And things like travel and restaurants will continue to become a bigger piece of that as more and more of the global economy opens up for cross-border travel. And so I think we see that in Europe cruises being booked, more Europeans eventually booking to the Caribbean next summer. And that will eventually turn up in higher pricing.

- All right, we'll be watching there as a lot of these things get back up to revving the engine, shall we say, back up to the way things used to be. But Jaime Katz, appreciate you coming on here. Morningstar senior equity analyst. Thanks again for all the insight there.