Will Royal Caribbean Stock Recover To $110 Levels?

BRAZIL – 2020/06/29: In this photo illustration the Royal Caribbean Cruises Ltd (RCCL) logo seen … [+] displayed on a smartphone. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)

SOPA Images/LightRocket via Getty Images

Royal Caribbean (NYSE: RCL) stock has jumped by almost 25% over the last two months, as investors saw news surrounding the strong efficacy of Covid-19 vaccines and the commencement of dosing in the U.S. as a sign of the beginning of the end of the Covid-19 pandemic. The jump in the stock price is largely warranted, considering that Royal Caribbean and other cruise operators have been bearing the brunt of the pandemic. Royal Caribbean suspended cruises in mid-March 2020 and has been burning cash (over $250 million per month as of Q3 2020), as it continues to incur significant fixed costs related to maintaining its fleet of cruise ships. Now, are further gains in the cards for Royal Caribbean stock, which still remains down by about 40% from highs seen in February 2020 before the Covid crisis hit the markets?

We think it’s unlikely that it will reach the $110+ levels seen in February 2020 anytime soon for a couple of reasons. Royal Caribbean’s U.S cruises and most of its global cruises have been suspended at least till the end of February and some sailings have been pushed further into 2021. Additionally, the vaccine rollout in the U.S. is also not progressing as quickly as expected due to initial hiccups. A much more contagious strain of the coronavirus, which was first discovered in the U.K, is now apparently spreading in the U.S. as well, causing concerns of a further surge. This potentially means that a return to normal could take longer than anticipated for cruise companies, resulting in further cash burn.

Even when Royal Caribbean eventually resumes its operations, it remains to be seen as to how quickly demand will pick up. More importantly, the company’s longer-term profitability remains a concern. Royal Caribbean has doubled down on its borrowings (long-term debt more than doubled from $8.4 billion in Q3 2019 to about $17.6 billion in Q3 2020) through the pandemic to fund its cash burn, and this will lead to higher interest costs, which is likely to continue to impact profitability down the road. The company’s recent stock sale and the related dilution is also likely to limit per-share earnings. We compare Royal Caribbean’s stock performance during the Covid-19 crisis with that during the 2008 recession in our interactive dashboard.

[10/26/2020] How Much Could RCL Stock Rise Post Covid-19

There could be an upside of over 80% for Royal Caribbean Cruises (NYSE: RCL) stock if its business recovers strongly post the Covid-19 pandemic. The stock trades at about $65 currently and has lost about 50% of its value year-to-date, as Covid-19 essentially brought the company’s business to a standstill. The stock traded at about $118 per share in February, as the markets peaked pre-Covid, and is about 45% below that level presently. That said, the stock has more than doubled from lows seen in March 2020, driven by its progress in shoring up its liquidity and the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market, in general, recover to a large extent.

RCL stock has significantly underperformed the broader markets year-to-date, as investors remain cautious about the prospects of cruiseliners. The U.S. CDC has indicated that cruise passengers are at increased risk of the person-to-person spread of infectious diseases, recommending that travelers defer all cruise travel. Cruiseliners from the U.S. have not sailed for the last seven months or so, and RCL is unlikely to resume the U.S. cruises until at least December. However, as the pandemic subsides, the company is likely to see demand rebound back fairly quickly. There are some indicators that customers could take to cruising fairly quickly once the health crisis subsides. For instance, in August, the company indicated that it was seeing a surge in bookings for the second half of 2021, despite very limited marketing.

Our conclusion on the company’s upside potential is based on our detailed analysis comparing Royal Caribbean’s stock performance during the current crisis with that during the 2008 recession an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2007-08 Crisis

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 In Recent Years Looked Good, But Current Situation Is Very Challenging

Royal Caribbean’s revenues rose from about $8.5 billion in 2016 to about $11 billion in 2019, as demand for cruises rose. The company’s earnings also grew sharply over the period, rising from around $6 per share to about $9 per share. However, the picture has changed drastically for the company over 2020. Over Q2 2020, Royal Caribbean’s Revenue saw an unprecedented 93% decline compared to the same period a year ago. Full-year sales for 2020 are likely to fall by over 70% and it’s very likely that it could take over a year for Revenues to return to pre-Covid levels, assuming that there are no major changes in consumer behavior post the pandemic.

Does RCL Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Royal Caribbean’s total debt has increased from $8.1 billion in 2016 to almost $19 billion at the end of Q2 2020, while its total cash increased from about $130 million to $4.2 billion over the same period, as the company raised funding to tide over the crisis. Further in October, RCL indicated that it would raise another $1 billion in new capital, part of which would come via senior convertible notes. While the company’s cash flows from operations grew from $2.5 billion in 2016 to $3.7 billion in 2019, with operations largely suspended, the company is currently burning through an excess of $250 million a month. While the company’s cash cushion appears relatively comfortable at present, if it doesn’t set sailing by next Summer with occupancy levels picking up, things could get tough.

CONCLUSION

Phases of Covid-19 crisis:

Keeping in mind the trajectory over 2009-10, this suggests a potential recovery of over 80% once the pandemic ends via the deployment of a safe and effective vaccine or via herd immunity, and customers are more confident about taking cruises. This would make a full recovery to levels of close to $120 that Royal Caribbean stock was at in February before the coronavirus outbreak gained global momentum.

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