"It's been a hell of an experience" - cruise ship passenger Johny Celaire.
Uh-oh, the cruise line continues to cause all kinds of press nightmares. You know that old adage that there's no such thing as bad press. Well, it doesn't really apply to this story as reports of 100-200 passengers aboard a Royal Caribbean (NYSE:RCL) ship have become ill with norovirus.
Noroviruses typically spread through contaminated water and foods, although they can also pass from person to person. Water becomes contaminated if human wastes enters drinking water because of flooding or from a sewage system that isn't working properly.
Passengers aboard the "Vision of the Seas" ship were returned to port after the outbreak started. The percentage of contaminated passengers is being reported as around 5%, from a boat that has capacity of 2435. The hard part through all of this is there is still no announcement from the company. This is going to make it worse as several news outlets already have interviews with people from the cruise about the conditions.
Royal was reported to already be sanitizing and cleaning the ship. The hope would probably be to not have to cancel any upcoming cruises. This particular ship, built in 1998, is hosting 10 and 11 night cruises through the Caribbean, so canceling even one cruise would cost the company an additional 10 days of revenue.
It was just a short time ago that I was writing about Carnival Cruise Line's (NYSE:CCL) own PR mess. The company had a ship that was stranded in the middle of the ocean with minimal food and poor sanitation conditions. That story and the reports of conditions spiraled out of control from interviews with passengers by local and national media outlets. With only a couple of outlets reporting on the "Vision of the Seas" outbreak so far, expect more news and interviews to come over the weekend.
Shares of Royal were down 3% on the trading day, with much of that coming from noon on with no official news from the company. Volume hit 7.5 million shares, more than three times the company's three month daily average of 2.2 million. With shares at $33.31, they are down only 6% from the Carnival PR disaster. Royal, with a 23.3% market share, is the second largest cruise line operator in the World. The company has a market share almost half of Carnival, which could mean a bigger impact by this one incident.
I expect shares of Royal and its peers to get hit hard Monday. There may be a buying opportunity in a couple of weeks for investors who like holding cruise line stocks for dividend yield and the long-term prospects of the interest. However, the time to hold cruise stocks is not now and I would recommend selling or possibly shorting Royal shares.
Even if Royal has no financial impact from this outbreak and continues to book passengers for upcoming cruise lines, shares are overvalued. For fiscal 2013, analysts on Yahoo Finance are expecting earnings per share of $2.49. This represents a current price to earnings multiple of 13.3.
Cruise passengers will no doubt be looking for refunds and compensation for their troubles aboard the ship. Lawsuits have already been filed against the Caribbean Cruise Line ship that left passengers stranded with minimal food options and horrible facility conditions. The company will also start discounting upcoming cruise to make sure it doesn't lose passengers going forward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.