[BT Financial Analyst] Royal Caribbean Cruises' stock price plummeted. Analysts say the global tourism industry is still in the cold winter

High inflationary pressure, recession risks, high oil prices, geological issues, the continuation of the pandemic, supply chain issues, and food inflation have all greatly affected the tourism industry.

$Royal Caribbean (RCL.US)$Royal Caribbean Cruises (RCL) stock fell more than 25% in May, underperforming the S&P 500 Index (SPX). Furthermore, the cruise operator's first-quarter earnings results were poor, resulting in a loss of nearly $4.57 per share.

Additionally, the company's first-quarter revenue was $1.06 billion, far below analysts' expectations. These troubling figures forced investors to sell shares, further affecting the value of Royal Caribbean.

Up to now, Royal Caribbean has declined by more than 53% since this year. Unfortunately, the first-quarter earnings report isn't the only concern surrounding the company. High inflationary pressure, concerns about a recession, high fuel costs, and Royal Caribbean's multiple dysfunctional fleets all send multiple danger signals to investors.

I'm bearish on this stock.

The problem that needs to be solved urgently

Royal Caribbean investors are of course not happy with the company burning money. Inflationary pressure has led to high labor and fuel costs, which are very difficult for companies to operate.

In the first quarter, Royal Caribbean used $1.87 billion in operating cash, which is almost equal to the amount of cash currently on its balance sheet. However, if the company maintains the same pace, it will soon run out of cash and be forced to seek help from the capital market to raise capital by issuing shares or borrowing money.

The problem is that Royal Caribbean already has a large amount of debt on its balance sheet. According to relevant data, the company's long-term liabilities exceed $20 billion.

Reaping rewards has not been easy for Royal Caribbean, especially as it hopes to recover from the pandemic. Over the past 10 years, Royal Caribbean's annual free cash flow has not exceeded $2.3 billion. Furthermore, no company can escape high interest rates. If Royal Caribbean decides to refinance, rising interest rates will put more pressure on the company.

Terrible news

Everyone knows that the US inflation rate recently reached its highest level in 41 years, which may cause the Fed to raise interest rates by 0.75%. Inflation isn't the only problem plaguing Royal Caribbean, however. The inverse yield curve has raised concerns about a recession.

The recession meant that consumers were spending less on goods and services, including cruise vacations. This may be a key reason for the recent volatility in cruise stocks.

Therefore, assuming that the risk of paying interest on high debts is added to the risk of a recession, in this case, cruise operators will face a worse situation, which may further damage the company's future profitability.

Is the future bright?

Recently, Royal Caribbean asked the FCC to install Starlink internet on its ships. This could be a game changer; however, the US FCC has yet to approve the use of Starlink on mobile ships.

According to Royal Caribbean, the company operates 24 vessels, but it's unclear if the company wants all ships to use Starlink or just a few. John Maya, the company's vice president of operations, said, “We believe we've found a real solution for our vessels.”

It's unclear if Royal Caribbean will be allowed to use Starlink for its mobile vessels. Royal Caribbean is likely to gain a first-mover advantage and feel revenue growth as a result. However, other cruise operators will not sit idly by and let the company profit alone.

Wall Street Views

On the Wall Street side, Royal Caribbean shares received a unanimous rating for moderate buying. Out of 11 analyst ratings over the past three months, the stock received 6 buy ratings, 4 hold ratings, and 1 sell rating.

Royal Caribbean's average target price is $82.40, meaning its potential to rise is 128.4%. Analysts' target stock prices ranged from a low of $50 per share to a high of $136 per share.

Summary: Is the stock attractive?

Royal Caribbean has taken a big step by applying to the FCC to provide Starlink connectivity for its vessels. This could be a game changer; however, it's still too early to celebrate the company's success. Considering the company's free cash flow history prior to the pandemic, Royal Caribbean seems like a reasonable investment.

However, investors must think outside the past and have the courage to question whether Royal Caribbean can once again succeed and return to a stable business environment. Currently, the company is burning money and is affected by high interest rates. If the company is unable to refinance its debts, it may face serious liquidity problems.

There are now a number of well-run companies to invest in, and Royal Caribbean doesn't seem to be one of them.

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