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Why Cruise Stocks Bounced Back on Tuesday

What happened

After cruise stocks sank in response to an analyst's downgrade Monday, investors refloated their boats on Tuesday morning, apparently based on some optimistic commentary from the CEO of Carnival (NYSE: CCL).

As of 11 a.m. ET, shares of Carnival had regained 2.6%, Norwegian Cruise Line Holdings (NYSE: NCLH) was up 3.1%, and Royal Caribbean (NYSE: RCL) was leading the pack higher with a 3.9% gain.

So what

Citing recession risk, investment bank Stifel Nicolaus "drastically" cut its earnings estimates for Carnival on Monday. That note apparently sparked a sell-off across the cruise sector. Thus, it was particularly timely to see respond Tuesday by pointing back to some of Carnival CEO Arnold Donald's thoughts on the matter.

Quoting from Carnival's earnings call last week, the trade publication pointed out that "in prior cycles, even in downturns, employed people take vacations ... and that's even more true in today's environment where people prioritize spending on experiences over spending on things." The CEO went on to talk up his own business, arguing that cruises "offer a compelling value proposition relative to land-based alternatives" -- which is debatable. What's not debatable, though, is that "there is pent-up demand for travel globally" as countries emerge from their pandemic lockdowns, and the cruise industry revives from its pandemic shutdown.

Given that the U.S. unemployment rate is at a historically ultra-low 3.6%, conditions actually do bode well for the cruise industry to turn profitable again ... eventually.

Now what

That's the point. Now here's the counterpoint that investors really need to keep in mind.

Up until Carnival reported first-quarter earnings last week, most analysts were confident that the company (and peers Norwegian Cruise and Royal Caribbean) would return to profitability this year -- as early as the third quarter, in fact. After Carnival reported its Q1 earnings miss Friday, however, and management clearly stated that it would not be profitable in Q3, investors have been disabused of that notion.

Polling all analysts, S&P Global Market Intelligence now predicts that Carnival won't turn profitable again for nearly one full year, and will earn a profit of just $0.01 per share in Q2 2023.

That's not even the worst news. The worst news is that as of today, numerous analysts are still on record predicting that Norwegian and Royal Caribbean will generate profits next quarter. But if Carnival, the biggest and best-capitalized of the cruise lines, isn't going to earn a profit until mid-2023, the chances of its rivals doing better look slim. (To illustrate the problems that could hinder them on their path back to profitability, consider Norwegian Cruise's latest announcement: It's canceling Hawaiian cruises aboard the Pride of America because it doesn't have enough people available to fully crew and staff the ship.)

Long story short, yes, cruise stocks are rebounding Tuesday. But all things considered, investors might be best advised to use this short-term pop as an opportunity to disembark.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.


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