Why Cruise Line Stocks Jumped This Morning

What happened 

Cruise line volatility continued on Wednesday but this time stocks were moving higher. There weren’t any major news items like earnings, but a rising stock market and falling oil prices have helped valuations today. It’s also possible that investors are speculating that student loan forgiveness will give consumers more money to spend on things like cruises. 

Shares of Carnival (CCL 4.84%) (CUK 4.08%) jumped as much as 14.8%, Norwegian Cruise Line Holdings (NCLH 7.86%) rose 8.2%, and Royal Caribbean (RCL 6.57%) popped 7.1%. The stocks were up 5.2%, 7.6%, and 7% respectively at 11:45 a.m. ET. 

So what 

The market may still be pushing shares higher after Carnival extended its 2023 debt due by 18 months yesterday. The market is at least looking for debtors to give the industry enough of a lifeline to return to full operations and hopefully profitability. More debt maturities may need to be extended or refinanced in the next few years, but that’s a worry for another day. 

On the market front, oil traded lower for most of the morning and is now down under 1% to around $93 per barrel. Oil is a key input cost for cruise lines, so the recent drop in oil should be a tailwind for the industry.

It may be coincidence, but President Joe Biden is expected to announce $10,000 in student debt forgiveness for borrowers making under $125,000 per year. This will give millions of people more money to spend and it’s possible they could spend it on cruises.

Now what 

Cruise line stocks are bouncing back today, but the trend since April has been lower because operations simply don’t justify a high valuation. You can see below that all three companies have enormous debt loads and operations still aren’t cash flow positive. It’s not clear when the cash flow picture will turn around. 

CCL Total Long Term Debt (Quarterly) data by YCharts

Unless companies can improve financial results, refinancing debt is just kicking the can down the road. That seems to be what Carnival is doing, and that will work until it doesn’t. 

Although there are some positive trends with consumer spending and energy costs, the cruise industry faces long-term structural challenges. Labor costs are rising and with working from home becoming more popular it could get even harder to get workers to live on a cruise ship for months. Demand for cruises also hasn’t returned and while there may be some lag from the pandemic, consumers may simply not see cruises as an attractive vacation anymore. 

Investors need to think about how cruise lines are going to be able to get operations back to profitability and either refinance or repay debt. Right now, both of those things seem like a tall task and that’s why shares have been trending lower. Today’s bounce is nice, but if I were a shareholder I would be taking money off the table because long-term these aren’t great stocks to hold. 

Leave a Reply

Your email address will not be published. Required fields are marked *