With the horrific debacle of the Diamond Princess dominating headlines and cruise ships losing customers and canceling trips due to the coronavirus, its no wonder stocks of those companies have dropped some 20% year to date.
Its certainly not the best of times for the big three publicly traded cruise ship companies: Carnival Cruise Line (CCL)which operates the Diamond PrincessRoyal Caribbean (RCL) and Norwegian Cruise Line (NCLH.) Still, reports of their demise, or even being in dire straits, are exaggerated I think.
To be sure Wall Street hassoured on the stocks. Uncertainty is one of the reasons we downgraded shares of cruise companies, says Tuna Amobi, analyst at CFRA. Norwegian, we have a strong sell. Royal we have a sell. Carnival we have a sell. We think this overhang will dampen investor sentiment.
And yet here is the indefatigable Richard Branson launching a brand new cruise ship line, named predictably, Virgin Voyages, in the teeth of the maelstrom. Bransons first ship, the Scarlet Ladycarrying 2,770 passengers and 1,160 crewwill reflect the usual Virgin hipness and will address some of the sustainability concerns that vex the business. All ships in Bransons planned fleet of four will be carbon neutral and will shun plastic and wasteful buffets.
Does Branson know something Wall Street doesnt? Could be.
Branson believes that the coronavirus, or more precisely COVID-19, is a temporary thing, and is so confident of that, he didnt even delay the launch, which he could have easily done.
Cruising is business with wind at its back, too. Before the coronavirus, some 32 million passengers were expected to set sail in 2020, two times the number of customers in 2009.
I find cruise ships to be super-cool, and I say that having never been on one. (Some day, some day.) Maybe it was watching The Love Boat when I was young, but really its the scale of the ships that I find so appealing. The biggest shipssome 300 of these behemoths sail the seasare over 1,000 feet long and 200 feet wide, weigh over 200,000 tons and carry 6,000 passengers, with the most luxurious having a like number of crew.
The companies are fascinating too. Did you know that both Norwegianwhich isnt really Norwegianand Carnival were founded by the same man, the late Ted Arison? And that Carnival, dually listed on the London Stock Exchange and the NYSE, is the only company included in both the S&P 500 and the FTSE 100? The Arison family has made a fortune from Carnival, the biggest of the three companies with a market cap of some $30 billion. Teds son Mickey, former long-standing CEO of Carnival and owner of the Miami Heat, is worth $7.8 billion, according to Forbes.
Royal Caribbeanwhich really was Norwegian originally but is now based in Miamiis the second biggest company with a market cap of $22 billion. RCL ranks as the stock market star of the group, up 1094% since its IPO in 1993 (and remember thats after being down 20% this year) versus 666% for the S&P over the same period.
Norwegian Cruise Line on the other hand began as a single car-ship ferry between England and Gibraltar in the 1960s and would go on to own iconic ocean liners SS France and SS United States. In 2007, Leon Blacks Apollo Management bought a 50% stake in Norwegian for $1 billion with TPG coming in to take a stake as well. Norwegians stock has trailed the market since its IPO seven years ago.
The cruise ship business is no stranger to disasters both large and small. While nothing approaching the Titanic has occurred recently, there was the sinking of the Costa Concordia (operated by a subsidiary of Carnival) off the Italian coast in 2012, resulting in 32 fatalities. And seven years earlier Somali pirates attacked a small cruise ship, the Seabourn Spirit. They were fended off by the crew, who used a water hose and sonic cannon capable of causing permanent damage to hearing from a distance of more than 300 metres (984ft), but not before the pirates fired automatic weapons and RPGs wounding crew members. And then of course there are the myriad cases of Norovirus, E. coli and Legionnaires' disease that have coursed through these vessels, none though significant enough to hinder the inexorable growth of this business.
But COVID-19, and the floating petri dish otherwise known as the Diamond Princess, have been a real threat. (Confusion doesnt help. Like when officials from the CDC were arguing that U.S. citizens from the ship not be flown home while the State Department saying they should.)
I personally think this is a bigger deal to the travel industry than any event since 9/11, says James Hardiman, an analyst at Wedbush. That includes SARS, Ebola, Costa Concordia crash, spates of terrorism and the Arab Spring.
Miembros de la prensa se congregan cerca del barco Diamond Princess en Yokohama, Japn, el martes 11 de febrero de 2020. (AP Foto/Jae C. Hong)
By the way, its not just the Diamond Princess, where 634 of the 3,700 passengers and crew tested positive...so far, that has put the cruise ship business in a bad light. Dont forget the World Dream which was held in Hong Kong for four days when the company learned that three passengers who had sailed on the vessel earlier were confirmed to have the virus. The quarantine was lifted after all 1,800 crew members tested negative. Even worse: The so-called Pariah ship Westerdam, which was denied docking at five ports; in Japan, the Philippines, Taiwan, Thailand, and Guam because of fears of COVID-19. The ship was finally granted entry to Cambodia. None of the 2,000 passengers and crew were found to be infected.
Not surprisingly, the business is hunkering down. Norwegian just announced it was canceling all 40 cruises in Asia this summer. The Wall Street Journal reports that four-day cruises on Carnival ships are available for as little as $139 per person this month. My colleague Alexis Christoforous reports that Norwegian expects the epidemic to hurt full-year adjusted earnings by 75 cents a share and it sees capacity growth of 8.1% for the full year, down from its previous guidance of 8.7%. Royal Caribbean has said the epidemic would shave 65 cents a share off its per-share earnings this year. It has also canceled sailings in southeast Asia and modified itineraries.
Even with all that, at some point these stocks are a Buy, right?
Hardiman notes that if you had bought cruise ship stocks during previous crises you wouldve made money. To some degree, my projection that a year from now stocks would be higher is based on the idea the virus will get contained. It will still be an issue most of this year and to some degree next year, but if I can it see it as an issue start to subside, he says. In others, buying the stocks is a bet on COVID-19 abiding, which it will at some point.
Meanwhile, good news, the Diamond Princess, will be ready to sail in April, after a good cleaning Carnival insists.
Bet you could pick up a ticket on the cheap.
This article was featured in a Saturday edition of the Morning Brief on February 22, 2020. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET.Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter:@serwer.
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