Why Carnival Corp, Royal Caribbean, and Norwegian Cruise Line Stocks Are Surging Full-Speed Ahead Monday

Saudi Arabia to the rescue?

Rich Smith

(TMFDitty)

Apr 6, 2020 at 3:16PM

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What happened

Call it a light at the end of the tunnel, or a new dawn breaking on the horizon. Whatever you call it, cruise line stocks are racing to catch it today. Stocks are broadly higher in afternoon trading (the  S& P 500, for example, is up 5.7%), but shares of cruise lines  Carnival Corp  (NYSE:CCL),  Royal Caribbean  (NYSE:RCL), and  Norwegian Cruise Line  (NYSE:NCLH)  are leaving the rest of the market in their wakes, up 25.3%, 18.4%, and 18.3%, respectively as of 1:45 p.m. EDT.

You can probably thank Saudi Arabia for that.

IMAGE SOURCE: GETTY IMAGES.

So what

But first, the macroeconomic news. In Europe, we' re beginning to hear rumors of a decline in the fatality rate of COVID-19 infections in Italy and Spain. And in the U.S., Vice President Pence is talking up " glimmers of progress" in efforts to slow the spread of the novel coronavirus, while President Trump says he sees a " light at the end of the tunnel."  

All of this news has stock investors ebullient that the crisis, while not at an end yet, may at least  have  an end. That' s why stocks are up broadly today -- but why are cruise line stocks up so much more than average?

Today it was reported that Saudi Arabia' s sovereign wealth fund has purchased an 8.2% stake in Carnival Corp. The fact that at least one investor doesn' t think cruise lines are doomed -- at least not this one -- appears to be spilling over to benefit other stocks in the industry, and so while Carnival is naturally the stock benefiting most from this headline, shares of rival cruise operators Royal Caribbean and Norwegian Cruise are enjoying strong gains as well.  

 

Now what

Will the momentum last? With shares of Carnival stock still down 84% over the past year, Royal Caribbean down more than 79%, and Norwegian Cruise suffering an even bigger 85% drop, one could be forgiven for thinking there' s an awful lot of upside to these shares right now. After all, when valued on trailing earnings, Carnival stock is selling for just two times what investors might presume it could earn when things get back to " normal," while Norwegian and Royal Caribbean aren' t much more expensive at 2.2 times and 2.9 times 2019 earnings, respectively.

Granted, given the  recession  this industry is heading into, it' s unlikely  any  of these companies are going to earn a profit  this  year. The hope, though, is that 2021 (and subsequent years) will look a lot more like 2019 than 2020, earnings-wise.

Of course, before that happens, the cruise lines are going to have to convince travelers that it' s safe to sail on their cruise ships.  Any volunteers?