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Bear Of The Day: Royal Caribbean Cruises (RCL)

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There has been a big rotation from tech into the cyclical underperformers over the past couple of months. With the presidential election in the rearview mirror, and vaccine announcements providing investors with a much clearer end to this pandemic tunnel, optimism surges into 'recovery' stocks. Some of 2020's dogs have been lifted to inequitable levels in which I would not want to be left holding the bag.

Royal Caribbean Cruises (RCL - Free Report) , the world's second-largest cruise line behind Carnival (CCL - Free Report) , is one such stock that has surged past its intrinsic value in recent months. At the same time, analysts continue to lower its long-term EPS estimates. RCL has been pushed down to a Zacks Rank #5 (Strong Sell), yet investors keep buying in the hopes of a robust economic recovery taking this business back to normality.

RCL has driven up 36% since the end of October, 10% above its average price target. It is time to consider pulling profits on this frothy cruise line stock.

The Pandemic & Tabooed Cruises 

The pandemic has tabooed cruises. Being in close quarters with thousands of strangers with no way to escape sounds like a literal nightmare amid this pandemic, and I think cruise lines will be hard-pressed to shift this narrative even in the post-COVID world.  

The story about Carnival's Diamond Princess that was supposed to be a 14-day luxury cruise around the islands of Japan and southern China, ended up being a month-long trip from hell. A passenger tested positive for the novel coronavirus 3 days before the ship was scheduled to dock. The 2,666 passengers were quarantined in their small cabins for the remainder of the extended voyage, while the number of confirmed cases racked up. There were over 700 confirmed cases by the time the cruise finally got all the passengers off one month after it took-off.

This was not the only cruise that experienced the virus's rapid spread in close quarters. This news has tabooed the cruise line industry and left it with a deep scar that will not quickly fade. These cruises will miss out on their peak season this year, and many consumers will be apprehensive about getting on a cruise ship for years to come. Being in close quarters with many people you don't know is the epitome of what we are being conditioned to avoid.

Financials 

This leisure driven business has already lost more in the last two quarters than it had made in its entire 2019 fiscal year, and the pain is far from over. Analysts are expecting similar misery in 2021, and maybe if Royal Caribbean can flip its tabooed narrative, the business may once again turn a profit in 2022. That assumes the cruise line will have enough liquidity to get through the rough waters in the coming quarters.

Royal Caribbean was forced to lay off over 25% of its workforce out of the gates in April and raised $3.3 billion in debt with an interest rate that reflected a very distressed company. Unfortunately, I don't think this will be enough to support the $1 billion+ losses it is incurring quarterly.

The company is now in the process of raising $1 billion in capital through what is known as an ‘at-the-market’ (ATM) offering. This will allow RCL to sell newly issued shares over any period of time they deem necessary. This ATM will dilute any shares currently held, and if they unload these new issues quickly, it could be devastating for the share price.

The company is holding a total debt-to-capital ratio at around 69%, which I suspect will continue to increase in the coming quarters.

Final Thoughts

RCL has had a good run from its COVID bottom on March 18th, driving returns of 223%, but I think now is the time to pull some profits.  

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