Why Cruise Line Stocks Slumped Today -- but Not as Much as the Market Overall

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What happened

Shares of cruise line stocks Royal Caribbean (RCL 0.51%), Carnival (CCL -0.72%) (CUK -0.93%), and Norwegian Cruise Line Holdings (NCLH -1.30%) were all down more than 5% in early morning trading, but had recovered to losses of roughly 2.5% as of 2:36 p.m. ET.

It wasn’t hard to figure out the reasons for the initial plunge — virtually all stocks were down big today after this morning’s hotter-than-expected consumer price index (CPI) report. The curious thing is why these names weren’t down nearly as much as other consumer discretionary stocks, such as large-cap technology names. 

So what

Despite a sharp drop in gasoline prices, the August CPI data came in hotter than expected, up 8.3% year over year and 0.1% month over month, above expectations for an 8% rise and a 0.1% decline, respectively. More worrying was core inflation, which accelerated to rise 0.6% month over month and 6.3% year over year, versus expectations of 0.3% and 6%.

With consumers continuing to get squeezed by high inflation, it’s probably not a great development for consumer discretionary stocks like cruise lines. On the other hand, it’s also possible that travel-related stocks may be in a better position than people think. That could be why these three stocks pared their losses today.

That’s because even though prices for things like electricity, shelter, and medical services rose, travel-related items such as gasoline and airline fares actually fell during the month, with gasoline down 10.6% month over month and airline fares down 4.6%. So, the costs to travel are actually moderating. Furthermore, fuel is a significant portion of cruise lines’ overall cost structure, so these three companies will also see relief on that front.

Finally, given that cruise lines are still not too far removed from the peak of the pandemic and have all recently abandoned their vaccination mandates, demand for experiences and travel should remain stronger than goods spending.

Now what

In addition to the aforementioned reasons for cruise stocks’ relatively good day, they also appear cheap according to their forward P/E ratios. Royal Caribbean and Norwegian trade around only 10.5 times 2023 earnings estimates, and Carnival trades around 12.2 times next year’s estimates.

However, that is just for their equity. Investors should still proceed with caution in these names because all three companies still have extremely high debt loads left over from the pandemic. In fact, each company’s enterprise value is roughly three times its market cap, reflecting high debt loads that are roughly double each of their market caps. So, on an enterprise value basis, these stocks are actually not that cheap based on next year’s earnings.

Furthermore, when it comes time to refinance these debt burdens, higher interest rates could mean these companies will continue to endure higher interest costs. That could put more pressure on earnings, as well as extend the time frame for these companies to dig themselves out of their debt holes. So even though these beaten-down travel stocks are handling today’s news relatively well, they are by no means in the clear. Continue to proceed with caution in cruise stocks. 

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.