This cruise line's stock plunges, but is it a good deal?

As the new coronavirus epidemic worsens, it creates a problem that will remain in the minds of investors for quite some time. Many companies have reported supply chain problems that have delayed manufacturing or forced store closings as authorities take drastic measures to contain the spread of the virus that causes COVID-19 disease.

One company that has been hit hard is Royal caribbean (NYSE: RCL). Its stock has dropped 22% in the past week alone. Since the start of the year, it has dropped 52% as the COVID-19 situation worsens.

In fact, the company had just released a sparkling set of results for fiscal 2019. Net profit hit a record high of $ 1.88 billion, up 3.7% from a year ago on the other, driven by a 15.3% year-over-year increase in total revenues.

With the stock now trading at its lowest level in five years, could the company be a good deal?

Travel brakes hit hard

Problems began to occur in late January when the media began reporting an epidemic of COVID-19 off the coast of Japan aboard the Diamond Princess, a cruise ship owned by Carnival (NYSE: CCL). In early February, due to the effects of the virus in China which then widened, Royal Caribbean canceled eight cruises outside Chinese ports in March, in addition to the three cancellations announced earlier.

Since then, COVID-19 has claimed its first victim in the United States, while travel restrictions have been tightened. The White House recently announced new restrictions on international travel. These restrictions are in addition to those already in place in many other countries. With Italy and South Korea among those reporting a huge spike in cases, it looks like these restrictions will not be relaxed any time soon.

Canceled cruises and refunds

Royal Caribbean has canceled all of its crossings to China and Hong Kong until departure on March 21 for its ship Spectrum of the Seas, while all cruises on the Quantum of the Seas have been canceled until end of March. All affected passengers will receive a full refund. These measures will not only have a negative impact on the company's revenues, but will also result in significant cash outflows.

As the situation remains uncertain, Royal Caribbean may have to cancel even more cruises in the coming months. In one ad last month, the company quantified the impact of cancellations until the end of April, with a projected total hit of $ 1.20 per share on annual results. This translates to a decrease of 13.4% if we use EPS of $ 8.97 for fiscal 2019 for comparison.

If the COVID-19 situation is not brought under control quickly, the cancellation of even more cruises could have a more significant impact on BPA for fiscal year 2020.

Additional costs accumulate

Besides the loss of revenue, Royal Caribbean also faces higher operating costs. These include the need to perform mandatory temperature tests for all passengers, as well as stricter disinfection measures to ensure that all surfaces, rooms and common spaces are declared free of virus.

These measures are necessary to restore confidence in the cruise industry, but will inevitably lead to an even larger drop in profits in the short term.

A severe but temporary blow to the results

With a wave of cancellations within the cruise industry, travel restrictions and additional layered costs, things seem pretty grim for Royal Caribbean at the moment.

But investors should keep in mind that they are in a marathon, not in a sprint. Negative sentiment and fear of the unknown drove the company's stock down to trading levels. It is trading at around 7.3 times its 2019 profit, implying that investors have assumed the worst.

Although the impact of COVID-19 may persist even after the crisis has been resolved, I am confident that people will eventually return to cruising. And when investors look back in five years, they could blame themselves for missing a golden opportunity to buy a brand name cruise company cheaply.