I’ve heard of “morning blues,” but what happened on the Mar. 9 session was exceedingly sour. In a single session, the Dow Jones Industrial Average dropped more than 2,000 points, setting a dubious record. But few sectors suffered more than cruise liners like Carnival (NYSE:CCL). Indeed, you can easily make the argument that CCL stock and its peers represent the face of the coronavirus.
After all, it was Carnival’s Diamond Princess that demonstrated the devastating, accelerative threat of the disease named Covid-19. What began as a single person who got infected devolved into more than 700 cases with eight deaths. While the Japanese government ordered an internal quarantine to assess and contain the situation, the move clearly failed.
But the crisis wasn’t just limited to Carnival, and therefore CCL stock. Because of the extreme dangers associated with the contagious disease, other cruises experienced entry denials. Essentially, everyone resorted to the basic understanding that cruise ships are mass-scale petri dishes.
As a result, the entire industry suffered. On Monday, Royal Caribbean Cruises (NYSE:RCL) suffered a steep drop of nearly 26%. Norwegian Cruise Line (NYSE:NCLH) also shed a similar amount, erasing nearly 27% of market value.
For its part, NCLH’s management team has put on a brave face. On a call with analysts last month, Norwegian’s CEO Frank Del Rio acknowledged a significant slowdown in bookings due to a ramp up in cancellations. However, Del Rio stated that “Nothing is permanent,” noting, “Customers do have a relatively short memory, thank God.”
I don’t remember a time when a CEO of a major organization invoked a higher power. For CCL stock and the cruise industry, they’ll need that and more.
CCL Stock Facing a World of Hurt
Not lost in this panicked environment is that, at least to contrarians, Del Rio is right. Customers do have a short memory. If not, no one would fly, drive, sail or do anything remotely posing risks. But given how quickly the coronavirus has changed the calculus of our society and economy, I must reconsider my own contrarian instincts.
First, I have never seen panic quite like what I’m experiencing. In my local grocery store, I didn’t find any toilet paper. At my local Target (NYSE:TGT), it was the same deal. No amount of SARS, H1N1, Ebola, MERS, none of it caused anywhere close to this kind of panic.
Second, CCL stock and its underlying sector face a PR crisis that could last indefinitely. It doesn’t matter if a cruise ship operator was involved or not. I believe most people take transportation understanding the acute risks involved. It also helps that those risks don’t occur often. For instance, most folks will eventually forget about Boeing’s (NYSE:BA) 737 Max 8 jetliner crisis: airplane crashes are very rare.
But getting sick on a cruise ship? That’s a distinct reality. Further, the response to the coronavirus has left paying passengers fighting for survival in a floating prison. Beyond that, once they’re allowed to dock, government officials will mandatorily quarantine them.
Frankly, it reeks of civil rights violations. And while no one is suggesting the coronavirus is Carnival’s fault, the company and industry are easy scapegoats.
If these problems weren’t enough, the Centers for Disease Control and Prevention urged travelers with underlying health conditions, along with older travelers to avoid cruises. Unfortunately, older folks represent a prime revenue source for the industry.
A Sector to Avoid for Now
I truly hope Del Rio is right again on the coronavirus issue. Although I loathe to use this phrase, something tells me this time might be different.
Logically, the quarter affected by Covid-19 will see substantial red ink. But according to the Wall Street Journal’s Costas Paris and Dave Sebastian, the damage may extend much further. The journalists wrote:
Coronavirus fears aren’t only upsetting plans for this summer. Forward bookings for the summer of 2021 and 2022 are down by as much as 40% in the Mediterranean, depending on the cruise, a senior cruise operator said.
To get around to recovering some of the lost growth opportunities, cruise operators must kill margins through deep discounts. But how deep is deep enough? According to a CNBC report, the airline industry reports that customers are “fearful at any price.” That does not provide any confidence for CCL stock.
Ultimately, the data right now points to a black swan event. And it’s gotten to a point where I wouldn’t be surprised if one of the cruise liner majors goes under. For contrarians that are angling to dive in, I’d say hold on. The worst is probably yet to come.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.