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 97% from 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.