The cruise industry has long been a popular choice for travelers seeking a unique and luxurious vacation experience. However, behind the glitz and glamor, the industry has been grappling with several inherent weaknesses. Those have left the sector particularly vulnerable to economic downturns and unforeseen crises. These susceptibilities have been brought to the forefront in recent years, causing investors to question the long-term viability of these cruise stocks to avoid.
One of the most significant weaknesses of the cruise industry is its heavy reliance on discretionary spending. Unlike essential goods and services, cruises are often seen as a luxury. Some consumers easily forego such treats during times of financial uncertainty, such as a stock market crash. Also, high interest rate environment and inflationary pressures have battered these cruise stocks to avoid.
However, travelers are focusing on experiences and are willing to pay for them. The result is record bookings and stronger pricing power for the cruise lines industry overall.
So, while it’s still full steam ahead, a few companies are struggling with other macro headwinds. Let’s examine three such stocks to avoid.
Royal Caribbean Cruises (RCL)
Royal Caribbean Cruises (NYSE:RCL) has demonstrated improvement in its financial results. However, the company is grappling with a substantial debt burden. Notably, it has around $20 million in cash and $21 billion in debt.
However, RCL is projecting strong performance for 2024, having raised its guidance due to robust demand. The company expects adjusted earnings per share (EPS) to fall between $9.90 and $10.10. This follows a notable debt reduction in 2023, when RCL paid off approximately $4 billion, aiming to reach investment grade metrics.
For 2024, RCL has scheduled significant capital expenditures totaling around $3.3 billion. This price tag was primarily for its new ship orders, including the Utopia of the Seas and Silver Ray. Also, the company anticipates a capacity increase of 8.5% compared to 2023.
Despite its positive outlook, its current and quick ratios stand at 0.19 and 0.09, making it a highly leveraged company. Therefore, it holds a risky position in the event of a broad sell-off in the indices, as investors typically undergo a flight to safety and away from these speculative investments.
OneSpaWorld Holdings (OSW)
OneSpaWorld Holdings (NASDAQ:OSW) provides health and wellness products aboard cruise ships. But the sailing line has experienced fluctuations in its stock performance. And, OSW could be substantially impacted if a stock market crash comes materializes.
Still, OSW has raised its revenue guidance for 2024 to $860 to $880 million, reflecting a positive start to the year. The company reported a significant improvement in Q1 of 2024. Revenues increased to $211.2 million, a 16% rise from the previous year. Also, net income reached $21.2 million, turning around from a loss of $15.9 million year-over-year (YOY).
But, the situation becomes dicey because OSW’s valuation is essentially hinged on the assumption of no broader markets’ correction and its continued incredible earnings growth run.
Yet, OSW trades at 55 times earnings, and its forward P/E is 18 times earnings. So although times are certainly good for OSW, its high P/E makes its stock price vulnerable to being sold off. This is specially true if the broader macro backdrop deteriorates in the face of higher for longer interest rates and stubborn inflation.
Norwegian Cruise Line Holdings (NCLH)
Norwegian Cruise Line Holdings (NYSE:NCLH) is another major player facing similar challenges. Despite some positive earnings, the overall volatility in the cruise sector and potential regulatory changes post-pandemic add a layer of investment risk in addition to the market risks it faces.
Additionally, NCLH is significantly leveraged, but to a lesser degree than RCL. Its liquidity ratios for its current and quick measures are 0.24 and 0.13, respectively. So this adds a dimension of financial risk to the equation.
Still, the company reported Q1 revenue of $1.9 billion for the end of 2023, marking a 30.8% increase from the previous year. And projections indicate a strong year ahead. Also, it forecasts an adjusted EPS of almost $1.23. This outlook is supported by a forecasted increase in net yield of approximately 5.5% and an occupancy rate expectation of around 105.1%.
Again, this could make holding NCLH a risky proposition. Clearly, its valuation is propped up via some optimistic assumptions about its fundamentals and the broader market.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
