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Analysts don’t seem too fearful about the prospect of bankruptcy for the big cruise-line operators, but they continue to find reason for concern in the beaten-down industry as the coronavirus outbreak worsens.
Goldman Sachs analyst Stephen Grambling threw in the towel on his bullish Carnival Corp. CCL, +7.81% call Tuesday, acknowledging that the stock was down 61% since he added the name to Goldman’s Americas Buy List almost a year ago, compared with a 2% drop for the S&P 500 index SPX, +0.98% over that span.
Cruise stocks extended their slides in Tuesday’s session and were each off more than 50% on the year.
“[O]ur original thesis that margin improvements and stabilization in Europe would drive a rerating is now overshadowed by a negative shift in global demand and potential for underperformance relative to our coverage given Costa, Holland America, and Princess brands have well-publicized COVID-19 disruption,” he wrote, referring to the disease brought on by the novel coronavirus that is believed to have originated in Wuhan, China, late last year.
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Grambling wrote that “nearly half” of Carnival’s capacity—the Costa, Holland America, and Princess brands—have attracted negative attention for coronavirus-related issues, while peers Royal Caribbean Cruises Ltd. RCL, +0.84% and Norwegian Cruise Line Holdings Ltd. NCLH, -0.65% “have had limited exposure.” He downgraded Carnival’s stock to neutral from buy, and he already had neutral ratings on Royal Caribbean and Norwegian shares.
Taking a more big-picture view, Grambling’s analysis of prior big shocks to the cruise industry indicates to him that demand for cruises “stabilizes quickly after a disruptive event ends.” Companies can feel an impact for about a year, since cruise lines rely on forward booking.
As Grambling moved to the sidelines on Carnival, another analyst took a more ominous view of the industry’s prospects.
“Price cuts, likely massive, will be needed to stop the bleeding,” SunTrust Robinson Humphrey analyst C. Patrick Scholes wrote in a Tuesday note to clients. Booking volumes have been in “free fall” lately, he said, but pricing has been fairly stable.
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While cruise lines have done promotions around things like free drinks and credits, they have yet to do an “unleashing of the discounting torrent that we and our industry contacts believe will be needed to get the industry back on its feet,” he wrote. Scholes added that his conversations with large travel agencies indicate that the sentiment around cruises is worse now than it was during the financial crisis because cruise lines are “front and center in the news headlines” and customers “do not want to be quarantined in a small cabin.”
“Unfortunately we have seen no evidence that an upward ‘less bad’ turn is beginning to occur just yet,” he concluded. Scholes has a hold rating on Carnival’s stock and buy ratings on Norwegian and Royal Caribbean shares.
See more: Cruise line stocks could still fall further, SunTrust RH says
Scholes still doesn’t think the companies are at risk of breaking their debt covenants, joining other analysts who are feeling reasonably secure about the companies’ liquidity prospects.
“We think bankruptcy fears are overblown,” Instinet analyst Harry Curtis wrote. “Companies have sizable untapped revolvers and new ships have committed export credit financing.”
Goldman’s Grambling wrote that the cruise operators are in a better liquidity position “than [the] surface would suggest.”
“The bottom-line is that export financing of growth capex buffers near-term liquidity and overall, but we see lower liquidity and use of the revolver driving year-end FY20 year-end net debt/[earnings before interest, taxes, depreciation and amortization] toward historic highs,” he said.
Royal Caribbean on Tuesday pulled its prior first-quarter and full-year forecast, which didn’t account for the coronavirus, while also announcing that it was increasing its revolving credit capacity and cutting expenses in an attempt to boost its liquidity.
