Why Carnival, Royal Caribbean, and Norwegian Cruise Lines Surged This Week – Motley Fool

What happened

Shares of Carnival Corporation (NYSE:CCL)(NYSE:CUK), Royal Caribbean (NYSE:RCL), and Norwegian Cruise Lines (NYSE:NCLH) all appreciated by mid-teens this week, up 11.6%, 11.9%, and 17.1%, respectively, as of end of trading Thursday.

There wasn't much in the way of company-specific news this week, but all three benefited from positive news regarding the omicron coronavirus variant. Omicron had caused all travel stocks to sell off at the end of November and into early December, so some relief on that front caused a big bounce.

Image source: Getty Images.

The omicron variant first hit headlines on Thanksgiving, and since then, travel-related stocks such as the cruise companies quickly reversed their recoveries from earlier in the year. Omicron has already started to affect consumer spending, according to Bank of America, which released data today showing consumer spending, mostly for international travel, declined as a result of the variant.

However, that uncertainty was likely baked into the cruise stocks coming into the week, so some good news about omicron's severity, as well as vaccine effectiveness, took some pressure off, allowing these stocks to bounce.

Last weekend, Dr. Anthony Fauci, chief medical officer to the president, said that while more data needed to be studied, it appeared omicron caused less severe disease than the delta variant. That good news was followed up by GlaxoSmithKlineon Tuesday, which said its antibody treatment appeared to be effective against omicron in preliminary tests. Then on Wednesday, Pfizerand mRNA vaccine partner BioNTechclaimed booster doses of its COVID-19 vaccine were effective against omicron, although the variant could elude antibodies in those with just two doses.

The news that boosted people are well protected, and that the new variant may not cause hospitalization and death, could only be positives for travel-related stocks. Cruise lines in particular are very sensitive to virus news, as all three companies are highly levered after taking on huge debt loads to get through the pandemic.

We have been in a trend over the past year or so where good news on the virus means cruise stocks go up, while bad news causes them to go down. Yet entering 2022, I'm not so sure that will remain the case. Despite the omicron variant being perhaps more manageable than first thought when it hit the news wires, there is still a lot of risk in all of these cruise stocks.

All three had to take on massive amounts of debt at high rates and also issued new shares at low prices to get through the pandemic, and those dilutive burdens are still on their balance sheets. Meanwhile, while the cruise lines have already restarted operations, all three companies are still generating big operating losses and continue to burn through cash -- even if the burn is slightly lower than last year.

Additionally, the last few months have seen costs of labor and fuel go up across the world, and both of those are key inputs in the cruise companies' cost base. And if interest rates rise next year, that could lead to even higher interest and refinancing costs on each company's massive debt load -- yet another cost headwind.

Cruise stock investors seem to think things will snap back to normal, or even better than normal, once the pandemic recedes. But with a new variant entering the scene and costs going up even before a recovery, a rebound in cruise stock financials could be much further off. I'd stay cautious on these names in 2022, even after this week's positive news.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Why Carnival, Royal Caribbean, and Norwegian Cruise Lines Surged This Week - Motley Fool