Royal Caribbean Cruises (RCL) stock dropped by more than 25% in May, underperforming S&P 500 (SPX). In addition, the cruise ship operator reported undesirable results in the first quarter that resulted in a loss per share of almost $4.57.
Furthermore, the first quarter’s revenue stands at $1.06 billion, which is well below the analyst’s prediction. These upsetting numbers forced investors to sell off the stock, further impacting RCL’s value.
As of today, RCL is down more than 53% this year. Unfortunately, the first quarter’s report isn’t the only concern surrounding RCL. High inflationary pressure, fears of recession, high fuel costs, and RCL’s multiple dysfunctional fleets present multiple red flags for investors. I am bearish on the stock.
RCL’s Cash Balance Raises Some Burning Questions
RCL’s investors are certainly not satisfied with how much cash the company is burning. Given the inflationary pressure, which has resulted in high labor and fuel costs, the going has been incredibly tough.
In its first quarter, Royal Caribbean used $1.87 billion in cash from operations, which almost equals the amount of cash present on its balance sheet right now. However, if the company keeps the same pace, it will soon run out of cash and be forced to knock doors of capital markets to raise money either through share issues or debt.
The issue is that Royal Caribbean already has piles of debt on its balance sheet. Based on its 10-Q, the company has over $20 billion in long-term liabilities.
This won’t be an easy payoff for the company, especially as it looks to bounce back from the pandemic. Royal Caribbean hasn’t achieved annual free cash flow of more than $2.3 billion for the past 10 years. Moreover, no company can dodge high-interest rates. The increase in interest rates will bring added pressure on Royal Caribbean if it decides to refinance.
An Inverted Yield Curve Brings Terrible News for RCL
Many people are aware that inflation hit a 41-year high the previous week, which could result in the Fed increasing interest rates by 0.75%. However, inflation isn’t the only issue haunting RCL. The inverted yield curve has given rise to fears of recession.
A recession means consumers will spend less money on goods and services – including cruise vacations. This is likely a key reason why cruise stocks are trembling lately.
So, suppose you add recession risk to the risk of paying high-interest charges on debts. In that case, cruise operators are facing a setback of worse economic news that could harm profitability even further in the future.
Is RCL’s Future Bright Despite the Headwinds?
High inflationary pressure, recession risk, high oil prices, the war between Russia and Ukraine, the ongoing pandemic, supply-chain issues, and food inflation have affected businesses tremendously. As a result, many companies have taken action to combat these issues – and so has Royal Caribbean.
Recently, Royal Caribbean requested the Federal Communications Commission (FCC) for a Starlink internet on its ships. The availability of internet connection could be a game-changer; however, the FCC hasn’t approved the usage of Starlink for moving vehicles.
According to Royal Caribbean, it operates 24 ships, but it is unclear whether the company wants Starlink for all its ships or just a few. The company’s vice president of operational excellence, John Maya, told PCMag, “We believe we have identified a true next-generation solution for our vessels.”
Despite the deals, it is unclear whether Royal Caribbean will be allowed to use Starlink for its moving vehicles or not. Moreover, Royal Caribbean might gain the first movers’ advantage and experience a hike in revenue. However, other cruise operators won’t sit back and let the company enjoy profits alone.
Wall Street’s Take
Turning to Wall Street, RCL stock maintains a Moderate Buy consensus rating. Out of 11 total analyst ratings, six Buys, four Holds, and one Sell rating were assigned over the past three months.
The average RCL price target is $82.40, implying 128.4% upside potential. Analyst price targets range from a low of $50 per share to a high of $136 per share.
Takeaway – Is RCL Stock Attractive?
Royal Caribbean has taken a big step by requesting the FCC for Starlink’s connection for its ships. This could be a game-changer; however, right now is too early to celebrate the company’s success. Nevertheless, Royal Caribbean might appear to be a reasonable investment considering its free-cash-flow history before the pandemic brought chaos.
However, investors must think beyond the past and question whether Royal Caribbean will return to its successful and smooth operating environment. Currently, the company is burning cash, is affected by high-interest rates, and could face severe liquidity issues if it fails to refinance debt.
There are multiple well-run companies to invest in right now, and it doesn’t look like RCL should be one of them.
