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Bear of the Day: Royal Carribeaan Cruises (RCL)

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“Don’t put all of your eggs in one basket.”

It’s an age-old aphorism, but thanks to its application to the principles of diversification in an investment portfolio, we hear it all the time.

It can apply to individual stocks as well. When there’s a single, binary event facing a company, owning the shares amounts to a simple “bet” on whether or not that event actually happens.  It’s certainly not impossible to make money this way, but it’s gambling – not investing.

In the case of the shares of the big cruise lines, the event shareholders are waiting for is US government assistance to plug the holes left by ceasing almost all revenue generating operations for six months and counting. Owning the shares not is essentially a bet on a bailout.

The shares of Cruise Ship Operators have been moving quite a bit lately, up on good news about vaccines or relaxed CDC guidelines and down on bad news about a surge in Covid-19 cases and new shutdowns in the US and abroad.

All the while, all but a tiny handful of ships are docked, and the first passenger cruise in months a ship called the Sea dream from a smaller operator was abruptly cut short and sent back to port with passengers quarantined in their cabins after one of them tested positive for Covid-19.

Huge operator Royal Caribbean (RCL - Free Report) looks to be in serious trouble. With all cruises cancelled through the end of 2020, the company was forced to more than double its long-term debt this year to $17.6 billion and floated another $1 billion in convertible securities. At the end of the third quarter, RCL had about $4 billion in liquidity on the balance sheet, and they’re burning between $250-290 million a month – leaving them with enough cash for a little bit over a year in a “no-revenue” environment.

In 2019, RCL posted net profits of $9.54/share. In 2020, the Zacks Consensus Earnings Estimate is a loss of ($18.33)/share. In 2021, it’s a loss of ($11.38)/share. As Covid-19 cases spike, those estimates have been falling fast, earning Royal Caribbean a Zacks Rank #5 (Strong Sell).

But could additional fiscal stimulus from the federal government change the situation? It’s not impossible, but it’s not likely either. First, Congress and the White House tried for months to make a deal on a replacement for the parts of the CARES Act that expired in July, but they were unsuccessful in coming to terms on anything.

Even if a deal is reached after a new Congress and President are sworn in next year, new stimulus is still at least several months away. (Remember, four months is over a billion dollars of cash burn for RCL.) There’s also no guarantee anything would go to the cruise industry. Airlines are essential to our way of life and would likely be among the first to receive targeted aid in order to ensure the survival of the industry.

Cruise ships are essentially a luxury item. With millions of Americans still out of work because of the pandemic, it could be difficult to find much public support for keeping them afloat – and there’s certainly no guarantee that any aid package they received would preserve existing shareholder equity.

With durable customer demand and impressive profitability during normal times, it’s certainly possible that the cruise industry could come back someday, but it’s likely to be a long time and they’ll still have all that debt to pay down – at fairly high interest rates. There are simply too many more attractive places to invest your money that don’t involve the possibility of going down with the ship.

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