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Sunday, February 5, 2023

3 Reasons to Avoid Climbing Aboard Carnival

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You don’t need any special skill sets to recognize the dire picture for Carnival (NYSE:CCL). Recently, S&P Global Ratings downgraded the cruise ship operator’s long-term credit rating by three levels to BB-. This cut comes after Moody’s Investors Services rated the company as “junk.” Naturally, this leaves CCL stock in quite a predicament.

What Will It Take for CCL Stock to Surge Higher Again?

Source: Ruth Peterkin / Shutterstock.com

To be fair, the negativity isn’t unreasonable. After all, it was the Diamond Princess – which is under the Carnival umbrella – that became the face of the novel coronavirus as it was forcibly quarantined off the coast of Japan. Later, other cruise ships suffered the same fate, bringing a black eye to operators like Royal Caribbean Cruises (NYSE:RCL) and Norwegian Cruise Line (NYSE:NCLH).

However, there’s a case to be made about deeply embattled investments making a comeback. Certainly, I wouldn’t recommend shorting CCL stock. With prices discounted almost ridiculously if you didn’t understand the context, they will nevertheless attract at least some contrarians.

In addition, states have pushed toward reopening their economies back to normal capacity. While the record surge in coronavirus cases is a big distraction, bullish investors may argue that the reopening initiatives can’t go backwards indefinitely. At a certain point, we’ve got to get on with our lives. Should enough people embrace this sentiment, CCL stock could recover sooner than expected.

But will vacationers adopt this philosophy? Of course, anything is possible. However, I personally remain skeptical for these three reasons:

PR Nightmare May Not Be Over for CCL Stock

If you ever wanted to kill someone, you should abandon whatever plan you have in your mind. Instead, invite your victim to an international cruise. After you’ve given the target a little bit too much to drink, simply toss (or accidentally bump) that person overboard.

Perhaps in most cases, nobody would care.

Now, just to be clear, I was being completely facetious about the above, except for one thing: you actually might get away with the heinous deed.

Though cruise ship companies sell you fun and glamour on their brochures, they of course leave out the seedy stuff. Typically, unless you were actively looking for such scandalous stories, you probably wouldn’t find them. Thanks to the coronavirus, though, everyone is putting this industry under the spotlight.

And one of the most disturbing practices is what Captain Kelly Sweeney terms “flags of convenience;” that is, a cruise ship operator could be incorporated in one country and their ships registered in another. Again, when everything is going well, this isn’t a big deal. But when something does happen, issues of jurisdiction can get confusing and ugly.

I don’t have the space to get into it in detail, but this discrepancy contributes to why you see cruise ship workers stranded at sea. With multiple international entities, it’s not clear who has responsibility for what or whom.

And now that more people know about this glaring controversy, they’re less likely to climb aboard. Logically, this is bad news for CCL stock.

Cruises Facilitate Infections

Still, the biggest concern that vacationers have toward the cruise liner industry is unquestionably the health component. Even in the best of times, these big boats are floating Petri dishes. But with a pandemic raging everywhere, you’re going to be a little on edge to say the least.

Further, I’m not sure how cruise ships will be able to mitigate the spread of infectious diseases. Do a little digging about this industry before the pandemic and you’ll come across several stories about disease-stricken ships. In many cases, the disease in question spread rapidly from one person to hundreds seemingly overnight.

With close quarters and the presence of ample food and beverages, all it takes is one person to not wash their hands to create a nightmare. And if that nightmare happens to be the coronavirus, passengers can look forward to weeks of quarantine. That risk alone is enough to make you think twice about CCL stock.

Also, as Health.com’s Leah Growth explains, “Another big issue regarding illnesses on cruise ships is that, once a cruise is complete and one group of passengers exits the vessel, another one almost immediately sets sail.” Thus, an outbreak could spread from one crew to multiple groups of passengers, very well causing an international cascade.

Will You Pay for New Normal Cruising?

In the turmoil surrounding CCL stock and the underlying sector, an unavoidable question exists: will people pay for the new normal of the cruise ship industry?

I’ve only been on a cruise one time in my life. As part of a musical festival at sea, it was a mesmerizing experience, especially for a nerdy high school jazz trumpet player. If I could go back, I’d definitely do it again.

Part of what made the voyage memorable was the people. We got to hang out with the other bands, and I socialized with my classmates in a non-academic setting. Not once did I consciously think about washing my hands.

I did clean after myself, mind you. But my point is that I didn’t consciously think about it. However, I imagine that cruising in the post-pandemic world would be an entirely different paradigm, one that I probably wouldn’t enjoy and one that I certainly wouldn’t pay for.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

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