Why Cruise Line Stocks Jumped Today

What happened

Cruise ship stocks jumped on Tuesday as there was good news from the industry and the market speculated that the worst of inflation may be behind us.

Shares of Carnival (CCL 7.15%) jumped 7.9%, Royal Caribbean (RCL 6.02%) increased by 7.3%, and Norwegian Cruise (NCLH 3.96%) jumped 6%. Stock shares are up 7.6%, 6.1% and 4.4%, respectively, as of 2 p.m. ET.

So what

The industry-specific news was that the Centers for Disease Control and Prevention (CDC) was ending a tracking program for COVID-19 cases on cruise ships. Regulators said there are still risks, but companies can manage their own risks.

This appears to be a turning point in how the CDC handles COVID-19 and its variants for travel. Masks are no longer required on planes, and now case notification is not even required for cruises. It may be a catalyst these companies need to continue their recovery.

The stock market is also up on Tuesday on relatively strong earnings reports at the start of the earnings season. Johnson & Johnson beat the estimates, just like IBM, although the latter reduced free cash flow estimates for the year. Investors are looking for any signs of consumer spending trends or profit indications, and so far the news has been reasonably good.

Now what

Most earnings reports and market reaction have been tied to large conglomerates or banks, so we don’t yet get a good indication of consumer spending habits. The fear is that inflation will cause consumers to cut back on discretionary purchases, such as cruises, although that fear hasn’t really materialized at this point.

While cruise line inventories may be up today, the challenge for them has always been to get back into balance. You can see below that all three companies took on huge debt during the pandemic and still don’t have positive operating cash flow to service the debt.

CCL Data on Total Long-Term Debt (Quarterly) by YCharts

It would take more than a return to pre-pandemic demand levels to achieve profitability, and I don’t think we’ll see that anytime soon. It will take much more than just fewer reported COVID-19 cases to return to normal operations.

The stock pop today is great, but keep in mind that investors may still be disappointed with cruise line stocks. They will likely have to raise funds to pay off the debt, which could dilute shareholders, unless they can return to profitability. It’s been the same story for over two years now, but the cash flow doesn’t seem to be improving.

Travis Hoium has no position in the stocks mentioned. The Motley Fool recommends Carnival and Johnson & Johnson. The Motley Fool has a disclosure policy.

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