How will the cruise industry survive COVID-19?

CFRA Analyst Tuna Amobi joins Yahoo Finance’s Alexis Christoforous and Brian Sozzi to discuss the future of the cruise industry after the coronavirus outbreak.

Video Transcript

ALEXIS CHRISTOFOROUS: We want to take a closer look now at the future of the cruise industry because cruise-ship companies have virtually no revenue coming in. Basically right now they are in full-on survival mode.

A number of them-- really, all of them have suspended operations. Here's just a taste of it. Royal Caribbean has suspended operations until May 11, some through July 1. Carnival also until May 11, some through November 1. And Norwegian-- again, that May 11 date seems to be the date for them, right-- suspending operations until May 11.

Also this morning, Deutsche Bank coming out and cutting the price target on all of the major cruise lines. However, we are seeing cruise stocks higher.

Here to help us make sense of it all is Tuna Amobi, analyst at CFRA. Tuna, good to see you again. What do you make of the fact that these cruise stocks are rallying today?

TUNA AMOBI: You know, I've got to tell you, Alexis, that, you know, the industry has really done a total 180 in the last several-- few months. It was as recently as January when we had a buy recommendation on all the cruise names. The fundamentals were pretty strong.

This year, 2020 was supposed to be another banner year, and all of a sudden all hell, you know, broke loose. So now we're seeing-- we have a sell on all the cruise lines. The reason for that is not really that we don't foresee some type of rebound down the road but we think that, you know, even when that occurs, it's going to be a totally new way of operating, new normal, not for the better. You know, we think all the travel restrictions in place and the consumer sentiment affecting cruise travel-- travel warnings from the CDC, the State Department. All of those things have been etched into the minds of consumers, so it will never be the same.

Remember, these stocks are now trading, even with this rally, still at anywhere from three to five times forward P/E ratios. So that kind of seems like a huge bargain for a lot of investors. Doesn't hurt that the sovereign wealth-- sovereign fund of Saudi Arabia just invested in cruise lines. But now we're seeing a lot of dilution equity and follow-on debt offerings from all these companies just to get them over the hump. So ultimately when things get back to normal, even in the best-case scenario we think it could take as much as a year or potentially longer for them to recover from this, even in the best-case scenario. And that's assuming that we're going to get some type of containment or mitigation of the COVID [? threat ?] anytime soon.

BRIAN SOZZI: Tuna, do you think it's likely-- you know, that stake that Saudi Arabia took in Carnival yesterday, that 8.2%, was pretty sizable. But taking a step back, do you think we might see some merger activity where Norwegian tries to join forces with Royal Caribbean? They don't have the sales coming in, but they might try to want to lower their cost base.

TUNA AMOBI: I think that a merger, while it may make sense on paper given what has transpired, I think I would argue that the conditions right now are less than conducive-- the capital-market conditions, the equity-- the operating conditions. And remember, these cruise companies drop their passengers kind of spread around the world, you know, in terms of cruise-ship deployment or passenger sourcing-- Asia-Pacific, you know, Europe, all the regions that are still navigating this COVID outbreak, including North America, of course. To your question, M&A remains a less distant possibility, in our view.

BRIAN SOZZI: Tuna, but does private-equity money come in the mix here? Norwegian Cruise Line still has private-equity sponsors involved in that company. Is this at a point where PE is sitting on a lot of cash and they see these valuations? And if you're Norwegian Cruise Line, why not try to go private?

TUNA AMOBI: There's certainly been some institutional activity involved in the trades that we've seen lately in the past couple of weeks. So sure, there's people out there salivating that, you know, this is arguably a once in a lifetime, you know, opportunity, including private equity.

That being said, as Alexis alluded to earlier, there's no revenue coming in. These companies have all kinds of costs that they have to incur just to, you know, get things operating, ready for a return to normal.

And remember, the one big potential lifeline that they could have gotten in the bailout, they've been all but shut out in the federal bailout because all these companies, as you know, are not incorporated in the United States. So if that were to have, you know, given them a lifeline as we see, for example, the airlines and auto sectors, that is something that would have provided some glimmer of hope. And that's why we think it's going to be a really long and arduous recovery.

ALEXIS CHRISTOFOROUS: Tuna, real quick, when we do come back, are these cruise-ship companies going to be just much smaller companies with fewer sailings?

TUNA AMOBI: I think there is arguments to be made that there is going to be significant reduction in capacity, much like we expect the airlines to do, just because it's going to take the average consumer some time to get back into that mindset of booking for cruise travel. So yes, we do expect some type of capacity reduction as opposed to the last few years where we've seen kind of new ships and all of that. I think all that's going to stay on hold right now.

ALEXIS CHRISTOFOROUS: All right, Tuna Amobi, analyst at CFRA, thanks for that deeper dive into the cruise industry right now.