Last Friday I received an interesting dose of the fallout from the coronavirus and subsequent societal shutdown that will force me to think outside the box as this crisis continues. It's nothing bad, just a small example of how life may change as a result of the pandemic and not something I ever would have expected.
My optometrist of more than 40 years has decided to sell his practice. Here's a guy who absolutely loves his work and has told me at every visit over the past umpteen years that he never wants to retire. He is great at what he does, is passionate about his work, has kept himself healthy (he once climbed Mount Kilimanjaro) and could have practiced into his 80s. But he had the realization through this crisis that if something happened to him his patients would be left high and dry, and he can't stomach that thought. It's sad for things to end this way.
I suspect there will be a bunch of what I'll call unintended consequences resulting from the coronavirus crisis and as investors we need to try and identify them, as difficult as that may be. We've got quite the conundrum wrapped in an enigma wrapped in a Catch 22: stop the spread of the virus, reduce deaths, but do so without needlessly wrecking the economy.
Of my recent columns, I continue to get the most questions about cruise lines, and specifically about Royal Caribbean Cruises (RCL) . Long story short, Royal Caribbean is great operator and great company that saw its shares plunge from $135 in January all the way down to $19 before rebounding last week and settling at $34.50 on Friday. It's a name that I want to own, but I can't pull the trigger on it because I still believe the worst may not be over. But when you see a drop of that magnitude, along with the 9% dividend yield, it's normal to think it might be a great buying opportunity.
Yet I just can't get on board at this point, and here's part of the reason why. The impact of the current cruise moratorium no doubt will hurt 2020 earnings, but it also will impact 2021. On March 13 Royal Caribbean voluntarily suspended cruises for 30 days; last week that suspension was extended through May 11. We were supposed to take a mid-May cruise that has not yet been officially cancelled. However, given that the country of destination has prohibited cruise ships with more than 500 passengers from entering through July 1, the trip's cancellation is a forgone conclusion unless there's an itinerary change.
To accommodate passengers whose trips have been cancelled, Royal Caribbean is offering them their money back or a 125% credit for a future cruise that must be taken by Dec. 31, 2021. The net effect is unknown at this time, but suffice it to say that revenue will take a hit into 2021. It's also unknown at this point whether the cruise moratorium will need to be extended past May 11. I honestly hope not.
Royal Caribbean's earnings expectations for 2020 have fallen from $10.09 a share last month to the current $5.78 a share, with the low estimate a loss of $3.73 a share. For 2021, the earnings consensus has fallen from $11.75 a share to $8.55, with a low of $1.33. I am not a short-term investor and usually don't concern myself with short-term earnings if a story is compelling. The problem here is that we don't know what we don't know, as in when cruises actually will restart and whether consumers will embrace the notion of being on a ship with potentially thousands of passengers, not to mention whether there will be staffing issues.
In addition, there's no bailout for the cruise lines; if you wonder why their margins can be so high, it's because they don't pay income taxes (Royal Caribbean is incorporated in Liberia). The dividend may look enticing, but it is very possible that it will be cut or suspended.
That's why I remain on the sidelines.
