Could Royal Caribbean Stock Rise 80% Post Covid?

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.

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
• 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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