While the turbulent waves faced by markets earlier in the year appear to be subsiding, cruise ship stocks like Carnival Corporation (CCL), Royal Caribbean Cruises Ltd. (RCL), Norwegian Cruise Line Holdings Ltd. (NCLH) are still floundering in troubled waters as they face unfavorable supply and demand  fundamentals. All three recently had some of their worst days this year after Morgan Stanley published a downbeat note in which analyst Jamie Rollo wrote, “We remain relatively cautious on the cruise lines given the high and increasing level of industry supply growth, slowing yield momentum, and weakness in the Caribbean and China,” according to CNBC.  

    Change from High
Carnival -15.3%
Royal Caribbean -22.7%
Norwegian -19.1%
S&P 500 -3.6%

Troubled Waters

Rollo indicates that the industry’s order book is now at a record 244,000 beds, meaning global supply capacity will grow 45% to 2025. To keep up with that growing supply and to maintain 2% to 3% yield growth, the cruise line industry would have to see demand grow by an annual 7.5% and 9.5%. Based on historical levels of 6% demand growth, matching that supply growth and maintaining those yields “seems optimistic,” in Rollo’s opinion. (See also: Economics Basics: Supply and Demand).

While so far the industry is showing solid booking volumes, prices remain flat and there are concerns about Q4 demand, especially as the dollar continues to strengthen. Rollo also cited rising fuel costs as one of the reasons he downgraded his earning per share estimates for Carnival, Royal Caribbean and Norwegian Cruise Line for fiscal year 2019, according to CNBC.

Carnival noted in its latest annual report that both fuel and currency were a “substantial drag,” but in spite of that, the company still managed strong performance. In their most recent annual report, Royal Caribbean noted that, “Adverse worldwide economic or other conditions could reduce the demand for cruises and passenger spending.” A stronger dollar, not to mention geopolitical concerns in the eurozone and risks of a global trade war could be just the kind of adverse conditions that would hurt the company’s bottom line. (See also: Global Economic Growth May Have Peaked).

Rising Tides

Of course, given that all these risks are well known, some think fears are overdone. Harry Curtis of Instinet notes that while the Caribbean region is a potentially weak area right now, it is being made up for in other regions. He believes that cruise line management teams have already been conservative in their forward guidance, and given their respective companies’ stock underperformance, they are now set to have strong performance in the latter half of the year, according to Barron’s.