Cruise Stocks’ Unusual Options Activity Says Royal Caribbean’s a Buy

All three of the major cruise operators were down on Wednesday. Royal Caribbean Cruises (RCL) was off the most, down 3.9%. Carnival (CCL) was the next worst, down 3.7%, and Norwegian Cruise Line Holdings (NCLH) was off 3.3%.

Yet, the S&P 500 barely moved. What gives?

Investors seem to be worried about a credit crunch, something that would not be good for the cruise operators, who use debt to build their billion-dollar floating palaces. No credit, no more new boats. That’s a problem for several reasons. 

However, the biggest could be that the cruise industry is expected to grow in 2023 and beyond. Not having the funding to keep adding new boats will not only slow its revenue growth but also slow each company’s ability to repay the billions in debt they owe. 

According to The Motley Fool, the total interest expense on that debt in 2022 for all three companies was $3.61 billion combined. With a double whammy of higher interest rates and a credit crunch, they might not be able to strike while the iron is hot. 

That would not be good for their long-term share price appreciation. 

However, if you’re an aggressive investor, yesterday’s unusual options activity for all three stocks suggests they might not be as bad a buy as some think.

I like Royal Caribbean. Here’s why I feel this way. In the end, I’ll suggest the options to buy to make money off cruising. 

The General Consensus Is Good

Global Ports Holding is the world’s largest cruise port operator. It operates 27 cruise ports in 14 countries, providing services to over 15 million passengers annually. Further, it has a 29% market share in the Mediterranean alone. So it's safe to say it knows a thing or two about the cruise industry.

It sees good times ahead for the cruise industry. 

“The major cruise lines have reported a record-breaking 2023 wave season, the global cruise fleet is now fully deployed, and occupancy rates, which returned to pre-Covid 19 levels in some markets during 2022, are expected to be at pre-Covid 19 levels across the global cruise fleet by summer 2023,” Travel Weekly reported the company’s recent comments.

Over the longer term, Global Ports Holding estimates that capacity will grow by 45% by 2027, with 75 ships on order and expected delivery by then. Capacity without demand wouldn't be fruitful. However, the port operator sees strong demand over the next five years. 

Investors can choose the data they use to decide about cruise stocks. The only problem: If you’re using quarterly reports to make your decision, you’re missing the big picture. Americans, and people from most other developed nations, like cruising.

Royal Caribbean’s Situation

Of the three major operators, RCL’s net debt is 2.5x its 2022 annual revenue of $8.84 billion. Carnival’s is 2.6x, while Norwegian’s is 2.7x, so they’re all in the same ballpark regarding the balance sheet relative to their respective revenues. 

When you look at its results for 2022, it’s easy to be jaded about its future potential. However, it’s a miracle that Covid didn’t kill at least one of these companies. 

RCL reported its Q4 2022 and full-year results in early February. Forget the full-year adjusted net loss of $1.9 billion ($7.50 a share) and focus on the positives.   

• It finished December with a company record of $4.2 billion in customer deposits.
• Since June 2022, 100% of its fleet has been operating.
• Its load factor -- the percentage of berths occupied by paying customers -- went from 57% in Q1 2022 to 95% in Q4 2022.
• Passengers spent 30% more onboard their ships in 2019. 
• Probably the most important stat was that it generated positive operating cash flow in 2022. In the two previous years, its combined operating cash flow was -$5.6 billion.

In 2023, the company’s bookings are accelerating, and equally important, they’re getting good prices for these bookings. For example, in the WAVE season -- January to March -- the company had seven booking weeks that were the highest in its history. 

As a result, it expects adjusted earnings per share of $3.30 at the midpoint of its guidance. That would be its first profit since 2019.

That could be why most analysts are generally optimistic about its stock. Barchart data gives it a Moderate Buy (4.10 out of 5) with a mean target of $72.10, 13% higher than where it’s currently trading.

What’s the Options Play?

On Wednesday, Royal Caribbean had nine options (6 puts, 3 calls) with volume of at least 1.25x the open interest. Of those, four had days to expiration of less than a week. I’ll exclude those. In addition, the March 24 $68 call had nine days to expiration, which wouldn’t be so bad if the strike price was around $65. So, I’m setting that one aside, too.

That leaves me with two calls and two puts.

• June 16 $67.50 call (93 DTE)
• June 16 $82.50 call (93)
• Sept. 15 $62.50 put (184)
• Jan. 19/2024 $57.50 put (310)

That last one, early in 2024, is intriguing. The bid on Wednesday was $8.60. That lowers the net cost of the shares to $48.90. In 2022, RCL stock traded below $50 from June through October and briefly again at the end of December. So, you’re talking about 5.5 months (46%) of the year.

However, if you’re intent on owning its stock, the odds are reasonably good that you won’t have the 100 shares put to you, leaving you with a 15% return on your premium income over nearly a year. Not a bad tradeoff, I’d say. 

The second put had an $8.75 bid, higher than above, but the duration is 41% less. So, the net price paid would be $53.75. That’s got a much higher chance of being put to you, but if you like the stock, that’s a 16% discount from where it’s currently trading.

The $82.50 call had an ask price of $1.28. That’s a 1.6% deposit. However, the delta is 0.16589, so a $7.72 increase in the share price (12%) would double your $128 without getting anywhere near the strike price. So, it’s a trade to make income rather than to buy RCL stock.

Lastly, the $67.50 call had an ask price of $4.80, bringing the share price to $72.30. As I write this midday on Thursday, RCL is trading at $64. Could it appreciate by 13% over the next three months? Of course, it could, but if you believe that to be the case, you should do a limit order today.         

My two cents: If you want to buy the stock but want a discount, selling the Sept. 15 $62.50 makes the most sense. 

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