Why Cruise Stocks Are Poised To Drop

Includes: CCL, RCL
by: Asset Buys

Royal Caribbean Cruises (NYSE:RCL) is a leader in the cruise line industry and it sails under a number of brand names including: Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara, and others. The past few months have been tough on the cruise line industry. Cruises have not been as popular with some consumers this year due to the Costa Concordia accident in Italy. European customers have also been holding back on vacation spending due to the growing economic concerns and rising unemployment in the Eurozone. While the incident in Italy could fade from the minds of many tourists, the economic problems continue and that is likely to keep pressure on the cruise industry. There are also newly emerging problems that investors should consider before investing in this sector. Here are some newly emerging challenges, that could cause cruise stocks to drift lower:

1. A few weeks ago, the price of oil plunged from over $100 per barrel to the low $80 range. This was good news for the cruise industry since fuel is a major expense, but the drop in oil is fading and it has climbed back to about $94 per barrel.

2. The price of food has been surging due to droughts in the Midwest, production issues in Russia, and weather problems in Brazil. This has caused basic food ingredients like corn, wheat, sugar, soybeans and other products to rise up to 45% in the past couple of months. Rising corn prices will lead to higher prices for chicken, pork and beef since corn is used to feed animals. Aside from fuel, food is another major expense for the cruise industry and a big jump in prices could impact profit margins in the coming quarters for companies like Royal Carribbean and Carnival Cruises (NYSE:CCL). The rise in food prices could be felt for many quarters. A recent CNBC article sums up the seriousness of the situation and it states:

"The US government on Friday stoked the fears of a price surge, saying the drought had forced the country's farmers to abandon cornfields covering a larger area than Belgium and Luxembourg combined. The Department of Agriculture slashed its forecast for the crop and predicted record prices over the next year."

3. Currency exchange rate trends are not favorable for U.S. based companies because the Euro is declining in value and the dollar is rising. This could continue since Europe is facing severe economic problems.

4. Royal Caribbean recently reported disappointing financial results. It announced net loss of $3.6 million, or 2 cents per share, for the second quarter of 2012. This is down significantly from net income of $93.5 million, or 43 cents per share, in the second quarter of 2011.

5. Royal Caribbean has a balance sheet that looks highly leveraged when compared to many companies. It has about $212 million in cash and around $8.27 billion in debt. That level of debt could become a real issue if the global economy continues to head lower.

Royal Caribbean Cruises Data From Yahoo Finance:
Recent Share Price: $25.68
52-Week Range: $18.70 to $31.96
Current Year Earnings Estimate: $1.76 per share
Dividend Rate: 40 cents per share which yields 1.5%
P/E Ratio: about 15 times earnings

No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.