The market is up over 20% from its historic drop in late March, which has many cautious investors looking for lingering value plays. One stock that hasn’t recovered with the rest of the market is Royal Caribbean (NYSE: RCL), down an astounding 75% year to date.

The company is drawing the eye of many value investors… and the ire of news outlets around the world for its role in spreading the COVID-19 pandemic. It begs the question: is Royal Caribbean stock a buy?

A cruise ship at sunset. Is it time to buy Royal Caribbean stock?

Royal Caribbean Company Background

If you’re considering investing in the travel and hospitality sector, Royal Caribbean has long been a market stalwart. Post-Great Recession until the start of 2020, Royal Caribbean stock price rose over 1200%, handily beating the market.

This growth wasn’t by accident. Royal Caribbean is the world’s second-largest cruise line operator, after Carnival Corporation (NYSE: CCL). The company also holds controlling stakes in three regional cruise lines. 

As the name implies, Royal Caribbean offers extensive cruise options throughout the Caribbean and Bahamas, as well as Mexico. However, the company is a global brand and also offers cruises to destinations to:

  • the Mediterranean (Greece, Italy)
  • Asia (China, Japan, Thailand)
  • South Pacific (Australia, New Zealand)
  • and North America (Alaska, Hawaii, Coastal). 

All told, Royal Caribbean visits some 300 world destinations, chartering more than 6.5 million people annually on 24 cruise liners. You can Read more on Royal Caribbean’s background here. 

COVID-19 Has Decimated Travel Stocks

Royal Caribbean stock plummeted over the past 90 days, exclusively on the implication of ferrying individuals carrying COVID-19 around the world. At least 13 ships in the company’s fleet have harbored confirmed cases of COVID-19.

Six of them among the top 15 most severe outbreaks at sea. Currently, the company has suspended all sailings departing on and before June 11th, 2020. 

Despite Royal Caribbean’s proactive forethought and quick compliance with the CDC, WHO and public health authorities around the world, the stock continues to suffer by affiliation.

Carnival Corporation and other cruise operators have experienced freefall in the market, alongside the stagnated stock prices of travel and hospitality companies suffering through travel restrictions.

Expedia Group (NASDAQ: EXPE), United Airlines (NASDAQ: UAL), Booking Holdings Inc. (NASDAQ: BKNG) and other sector leaders are similarly depressed. 

Beyond Royal Caribbean Stock’s Headlines: A Stable Balance Sheet

A Stable Dividend

For investors thinking about opening a position in Royal Caribbean stock, look past the headlines at the company’s financials. What you’ll find is a surprisingly stable balance sheet and a fair history of good fiscal management. 

The first thing that jumps off the balance sheet is the Royal Caribbean stock dividend: 9.06%. It’s a savory draw for dividend investors, though high enough for skeptics.

Based on the recent stock performance, it might also be a cut risk if cruise operators don’t see any government stimulus funding—which they’re not likely to.

More Positive Signs 

Beyond the dividend, there’s a lot to like about Royal Caribbean’s current financials for value investors. The stock’s plunge puts it at a meager 3.85 P/E ratio, which puts it firmly in value territory for those with a positive thesis.

Digging deeper, the company hit or beat its target EPS every quarter in 2019. Unfortunately, due to circumstance, they’re projected negative EPS over the next two quarters.

Royal Caribbean has a stable balance sheet—even at the start of the COVID-19 pandemic. In December 2019, the company had revenue of $2.5B, a profit margin of 10.85% and $234.74M cash on hand.

With $30.32M in total liabilities and stockholder’ equity on the books, investors don’t have to be too worried about financial mismanagement on top of the current market conditions. Free cash flow could be stronger at around $700,000, but it’s nothing to scoff at. 

Two Drawbacks

There are two big drawbacks for Royal Caribbean stock and all cruise lines in general. First, they’re asset-heavy businesses. Every cruise vessel is a depreciating asset on the balance sheet for as long as they’re in service—which is about 30 years. This leads to the second issue. 

According to the company’s most recent 10-k filing, they’re looking at roughly $5.5B in short-term liabilities in 2020. With their chief revenue source (bookings) shut off, it’s going to be difficult for them to avoid default without taking on private equity.

Which isn’t likely to benefit shareholders. 

Buy Royal Caribbean Stock Today, Hold Tomorrow

Is RCL stock a buy? It depends on your comfort with risk. In the short term, Royal Caribbean is going to continue getting beat up. It’s never safe to try and catch a falling knife, and Royal Caribbean has been a textbook definition of one.

Until the stock stabilizes at a bottom, it might be best to avoid. There’s also short-term uncertainties still swirling about COVID-19 and government aid, as well as the state of the dividend and the company’s short-term liabilities.

If you can stomach the immediate risk and afford to sit on it for a time horizon of three to five years, Royal Caribbean could be a gem in your portfolio.

Royal Caribbean’s stock has a history of proven growth after economic downturn, responsible management behind it and a proverbial moat as part of an industry oligopoly. Just prepare to take on water in the short term as a crisis investor.