The cruise stocks shrouded in the shadow of the epidemic are the sectors that have really been "crippled" in this round of slump in US stocks.

The three cruise giants-NYSE:CCL, NYSE:RCL and NYSE:NCLH-have fallen 66 per cent, 73 per cent and 79 per cent respectively since the US stock market pullback on February 19th. During that period, the S & P 500 fell 29 per cent. The market value of the carnival has shrunk by nearly $20 billion in two months. They all say, "I am greedy when others are afraid." if you want to look for gold in the bear market of US stocks, are cruise stocks potential gold? After all, the cruise business can survive. However, the key depends on whether the operators can survive the crisis and avoid bankruptcy.

What is the impact of the epidemic on the profits of cruise companies?

On Thursday, Carnival announced a voluntary suspension of its 18 Princess ships until May 10, and Trump announced on Friday that all three cruise companies had agreed to suspend operations for 30 days.

It can be said that cruise operators are in a desperate situation in the short term: there has been a surge in order cancellations, bookings have plummeted, and the US federal government particularly discourages sea cruises for the elderly-the core customer base of cruise ships.

Analysts on average expect the carnival's EPS to be $3.22 in the fiscal year to November, compared with $5.11 in the same period last year, according to data cited by Barron Weekly. The Royal Caribbean EPS is expected to fall from $11.18 to $7.32 in 2020, and Norwegian cruise ships are expected to fall from $5.94 to $3.66.

This is still the initial estimate. After all, the United States is still in the early stages of fighting the epidemic, and no one can predict how the situation will develop and to what extent it will eventually affect cruise ships. Carnival said on Monday that it expected the 2020 fiscal year to turn into a loss.

Can carnival and so on avoid bankruptcy?

The outbreak is a major test of liquidity (that is, cash available) for cruise ships suffering from high fixed costs.

Judging from the leading carnival of the three cruise ships, the current view on Wall Street is that it still has plenty of liquidity, but the epidemic may cause its leverage ratio to soar.

As of the end of fiscal year 2019, Carnival still had $12.5 billion in liquidity, including $182 million in cash, $2.8 billion in unwithdrawn revolving credit and $9.5 billion in export credit.

According to the latest estimate of Morgan Stanley analyst Jamie Rollo, the capital expenditure of this year's carnival is $7 billion (of which $4.8 billion is for new ships and $1.8 billion for debt repayment). Given its cash on hand and unwithdrawn credit, the carnival is expected to have nearly $7 billion in liquidity; if income falls by no more than 21% this year, it will be able to generate enough cash flow. In 2019, the carnival's revenue was $20.825 billion.

In terms of leverage, Carnival's net debt / EBITDA (earnings before interest, tax, depreciation and amortisation) ratio was the lowest of the three cruise operators at the end of 2019, at 2. Deutsche Bank predicts that if EBITDA falls by 20 per cent, the leverage ratio will rise to 3, which is not good, but not very bad.

As for the other two cruise operators, they are also using credit markets to increase liquidity.

Revolving credit in the Royal Caribbean increased by $550 million and Norwegian cruise ships increased by $650 million. At the same time, Royal Caribbean said it would save cash by reducing capital expenditure and operating expenses to increase liquidity by another $1.7 billion by 2020. Norwegian Cruises stressed the company's ability to adjust operating expenses and discretionary capital spending to deal with the crisis.

Similarly, Deutsche Bank estimates that if Royal Caribbean maintains EBITDA in 2019, its net debt / EBITDA ratio will rise from 2.9 to 3.5, manageable; if EBITDA falls by 20 per cent, leverage will rise to 4.6; and if EBITDA falls by 50 per cent, it will be 8 times leverage, meaning the company may not be able to repay its debt. If the EBITDA of Norwegian cruise ships falls by 20 per cent, the leverage ratio will rise from 3.4x last year to 4.3x.

Summary

Judging from the above financial situation, bankruptcy should not be a concern for Carnival, Royal Caribbean and Norwegian cruise ships. As for the question of when the cruise industry will improve, at least according to Nomura, the industry may not recover partially until 2021.This also means that the three major cruise operators are likely to face quite a long period of downturn.