After the outbreak of the epidemic, cruise line stocks have skyrocketed.

The stock of Royal Caribbean Group (NYSE: RCL) has increased by 294%. Norwegian Cruise Line Holdings Ltd. (NYSE: NCLH) has increased 188% in value. Carnival Cruise Lines (NYSE: CCL) has gained 124%.

According to current expert analysis, these stocks may have further to run.

Traders may find cruise line stocks appealing as a result.

Nonetheless, investors should proceed with caution at this time.

Many headwinds must yet be removed before the cruise line business can sail smoothly.

These impediments are debt, pricing power, and the country’s enduring recessionary threat.

Cruising Remains Popular

Consider that. At the start of the Covid-19 epidemic, some analysts predicted that a global pandemic and the uncertainty caused by an airborne virus would dampen people’s desire to travel.

That hasn’t happened.

Cruise line bookings were good in 2022 and are expected to remain strong in 2023.

Part of this was predictable. There is a devoted following of cruise aficionados who will always return to the sea.

And the pandemic has caused all cruise companies to reconsider how they have previously done things in order to create a more frictionless environment in an environment where socializing is the name of the game.

Some hesitant travelers have returned as a result of this.

In addition, a Morning Consult survey of 2,200 Americans found that trust in cruise lines is increasing.

Substantial Discounts are Being Phased Out, but Will Demand Remain Strong?

Deep discounts were another reason that enticed travelers to return to cruises.

Taking a cruise has long been regarded as a good investment when compared to other vacation options.

This was especially true as cruise lines used incentives to entice returning consumers.

It’s effective. But at what price?

To survive the epidemic, every cruise line was compelled to incur enormous debt.

Now that the ships are back at sea, the emphasis is shifting toward profitability.

This is where things become murky.

Some travelers discover that the cost of a flight to the port of departure exceeds the cost of the cruise and airfare is not likely to fall any time soon. Yet, unlike airlines, it is unclear if cruise line stocks will be able to pass on expenses.

Debt Continues to be a Significant Drain on Earnings

The good news is that several of the major cruise operators anticipate profit in 2023.

The bad news is that it appears that most of that has already been factored in.

Royal Caribbean, for example, anticipates positive earnings per share of $4.84 in 2023.

After several years of losses, this is heartening.

Nonetheless, that is almost similar to half of the company’s full-year EPS in 2019 ($9.54).

That is the main problem. RCL stock was worth about $133 per share at the end of 2019.

It is currently selling at roughly $70 per share as of this writing.

You could argue that Royal Caribbean was trading at a discount to the S&P 500 at the time.

Nonetheless, it is presently trading at a premium.

Consider Carnival’s capital structure currently vs at the end of 2019.

As of February 27, 2023, the number of outstanding shares has increased from 684 million to about 1.1 billion.

That’s a lot of dilution to take in for investors. And the company’s overall net debt has nearly tripled to $31.7 billion.

Fears of a Recession

Revenge travel is still going strong. While the fact that customers were transitioning from buying things to buying experiences makes sense, it doesn’t explain the elasticity of this desire.

Consumers have used their credit cards, and savings rates are beginning to rise, according to economic data.

None of this shows a desire to travel.

One popular notion is that many recently laid-off tech workers take time off before commencing their next job.

If this is the case, demand for travel is likely to weaken as the year progresses.

Don’t Get Caught in a Value Trap

It can be tempting to look at cruise line stocks with starry eyes at a time when value is hard to come by.

Notwithstanding their advances since the epidemic, these firms are not in the same financial situation as they were in 2019.

That is not the companies’ fault. It doesn’t mean they’re as gorgeous as they appear.

While cruise line stocks are not as speculative as the meme stocks of 2021, they nevertheless belong only in the risk-on portion of a portfolio and it should only account for 5% to 10% of your whole portfolio.

Royal Caribbean appears to be the finest of the lot, but that’s a shaky endorsement.

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