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Does Coronavirus Crisis Throw Cruise Stocks in the Soup?

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With the coronavirus threat on the rise, the $45-billion worth Cruise industry has come under significant pressure. The space, which is a key component of the Zacks Leisure and Recreation Services industry, is feeling the heat due to suspension of cruise operations from China.

Cruise business from China constitutes (5% of the total industry) a small but a steadily growing pie of the overall cruise industry. Notably, the outbreak of the COVID-19 virus cancelled a number of voyages in other parts of Asia, which accounts for another 5% of the cruise business.

While cruise business from China and Asia slumped considerably, bookings for the broader business outside Asia softened recently due to travel restrictions to contain the spread of the contagion.

Since this stalemate refuses to relent, industry participants find it hugely difficult to determine the full financial impact on the industry for the current fiscal. However, the epidemic can take a big bite out of the cruise line business this year. The situation can even do greater harm  to business since it is the peak booking season for the cruise liners.

Cruise Stocks Take a Hit

Driven primarily by the coronavirus infection year to date, shares of major cruise operators, namely Norwegian Cruise Line Holdings Ltd. (NCLH - Free Report) , Carnival Corporation & Plc (CCL - Free Report) and Royal Caribbean Cruises Ltd. (RCL - Free Report) have declined 11.5%, 15.5% and 16.5% each. Moreover, the  industry has declined 6.2% against the S&P 500’s Composite rally of 5%.

Major Operators Slash Earnings Guidance

Royal Caribbean, which sources nearly 6% of its capacity from China, called off 18 voyages in Southeast Asia. This, in turn, is likely to weigh on 2020 earnings results by 65 cents. Management estimates to incur an additional 55 cents  penalty if it was to cancel all the remaining Asian voyages through April

As expected, Carnival is currently unable to ascertain the full financial impact on its fiscal 2020. In the event that  the company has to suspend all its operations in Asia through the end of April, it would hurt its fiscal 2020 financial performance by 55 cents-65 centsper share, which includes guest compensation. Further, the impact on global bookings will affect the company's financial performance.

Other Headwinds

The COVID-19 episode is no stranger  to the cruise industry, which earlier survived norovirus, Zika, SARS, etc. Quick steps, such as quarantining the ships and health scanning are taken by the companies for which, the loss of revenues is certain. But this disruption should be temporal for the industry, which is also grappled with other issues.

The cruise industry’s growth trend in 2020 is likely to ease due to weaker pricing in continental Europe, the US ban on cruise travel to Cuba and volatile fuel prices. Also, regulations from the International Maritime Organization (IMO) pertaining to sulfur emissions at sea, which started this year, are likely to escalate regulatory compliance costs for the related players.

Per the credit rating agency Moody’s in 2020, combined lodging and cruise earnings growth are expected to slow down between 4% and 5%, indicating a decline from its earlier expectations of 6-7% growth.

However, Cruise Lines International Association estimates 32 million passengers to cruise in 2020, suggesting an improvement from 30 million in 2019.

Zacks Industry Rank Indicates Dismal Prospects

The cruise industry is part of the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #178, placing it in the bottom 30% of 255 Zacks industries.

The group’s Zacks Industry Rank, , which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Zacks Rank

Each of the stocks including Royal Carribean, Carnival Cruise and Norwegian Cruise carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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