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Royal Caribbean Cruises shares (NYSE: RCL) are starting to pick up, this despite being downgraded by none other than Morgan Stanley analyst Jamie Rollo. He gave Royal Caribbean Cruises an underweight rating with a $3 price target.

Royal Caribbean Cruises stock is not behaving as you would think. Having plunged off a cliff with most of the other travel sector stocks in March, cratering from about $117 to hit a low of around $22, the stock has been climbing ever since and making investors some decent returns.

Conventional wisdom would have it that Royal Caribbean Cruises should still be struggling, as if there is one sub-sector within travel that has received the worst publicity over the course of the Covid-19 pandemic, it is the cruise line sector. Yet here we are with the stock at $58.11.

Carnival Corp also doing well

Rival cruise line Carnival Corp (NYSE: CCL) has also been shrugging off the virus, up from $8.80 on 1 April to reach $17.25 at the close in New York yesterday.

Morgan Stanley is saying that it does not thinking serious cruising will resume until Q4 of this year. Cruise ships have been particularly vulnerable to coronavirus, both because of their enclosed environment and the fact that they tend to cater to older travelers.

The likes of the Cruise Line Industry Association are drawing up plans for safer sailing when they get the green light for this to resume, but in a week where doubt is being drawn over whether companies will be able to host Christmas parties, the thought of cruises re-starting in October or November seems somehow far-fetched.

Does Royal Caribbean Cruises have enough cash to survive?

Analysts think Royal Caribbean Cruises has enough cash to get it through into 2021. It has $3.45 billion in liquidity and is getting through $330 million in cash every month. To go deeper into 2021 would require further cash raising, to the tune of $1.5-$2.0 billion. This is a tall order.

Morgan Stanley has said EBITDA for the cruise lines is somewhere in the region of 80-90% of what it was last year.

We don’t think Royal Caribbean is going to die a death but it is going through some tough times. Covid-19 is not going to go away and governments are focusing on the situations where the virus tends to proliferate. It likes enclosed spaces like restaurants, gyms, schools and, yes, cruise liners. Authorities will be focusing on how they can track the spread over the next few months, but they won’t want to give Covid the opportunity to do its worst, which it patently can on a cruise ship.

Royal Caribbean’s shares obviously still have plenty of fans and have performed better than many analysts have expected. The stock is more one for the long-term value player, who is happy to keep it until life returns to normal and it can get back up to the valuations we saw last year.

You have, however, already seen plenty of upside in these sustained gains for the sector as a whole. Key risk factors are going to include not only the virus itself, but the anticipated reduction in spending on holidays which is going to occur as unemployment and an economic recession start to bite in the US and elsewhere.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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