Should You Buy This Coronavirus Victim On The Dip?
The coronavirus epidemic has been felt in just about every major market sector. But few groups have been punished quite like the cruise line industry.
Travel across parts of Asia has been severely restricted to help contain the dangerous respiratory illness. Needless to say, this has led to the cancellation of many cruise itineraries. Images of stranded passengers quarantined on ships like the Diamond Princess aren’t exactly spurring demand for trips to other destinations either.
Even before this outbreak, Carnival (NYSE: CCL) and its competitors have been obsessed with cleanliness to ensure the well-being of guests and crew members. Now, they have been forced to take more draconian measures. Travelers who have recently been to mainland China aren’t currently allowed to board Carnival ships. Royal Caribbean is denying entry to anyone who has been within six feet of someone who has visited China or South Korea within the last two weeks.
Passengers with so much as a sniffle can expect a mandatory health screening.
The three major cruise lines have already canceled about 40 cruises and rerouted dozens of others to safer ports. Considering China accounts for about 10% of the global cruise market, this is more than just a minor travel disruption.
Companies are understandably hesitant to release updated earnings guidance just yet. That’s because nobody knows when the virus will finally be corralled. The longer these travel fears persist, the greater the financial impact.
Inside The Numbers
Royal Caribbean indicated that if the situation deteriorates, it might lead to a 12% drop in earnings this year. Carnival sent out a special statement as well. It warned that if travel throughout Asia was suspended until the end of April (which hasn’t happened yet), it could erase about $0.55 to $0.65 per share from the bottom line. That’s roughly 13% of this year’s projected profit.
We likely haven’t seen the last of the selling pressure. But let’s put things in perspective. Yes, earnings might take a 15% hit this year. But CCL shares have already fallen by 50% — sinking from $66 to a 5-year low of $33.
In the meantime, this stock was yielding 4% not too long ago. Over the past five years, its average yield was only 2.85%. But now it’s paying is now paying 6.3%, more than three times the broader market average.
The stock also sports some ridiculously low valuation metrics. I’m talking about a price-to-earnings ratio in the single digits (about 7). The stock also sports a price-to-book value of 0.89. (Generally speaking, anything less than 1 is a good value.) Meanwhile, the payout ratio of 46.3% indicates there is more than enough coming in the door to meet the stock’s dividend obligations.
Action to Take
Unless the situation gets dramatically worse (which we can’t completely rule out), I would argue the damage is already priced into the stock at this point. The cruise industry has been tested by these kinds of outbreaks before. And it’s always bounced back to full strength once things die down.
I think the coronavirus will be a memory 18 months from now. Do your self a favor and look into CCL. It might be smart for new investors to take a wait-and-see approach before loading up on the stock, however, just to be sure. But this is one of those rare values in the market that could pay off for bold investors in the long run.
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