By Teresa Rivas

Recent years have seen investors lining up for cruise stocks like hungry passengers at an all-you-can-eat buffet. New comments about taxes put a stop to that party faster than a mouse at the salad bar.

The problem kicked off last week when Commerce Secretary Howard Lutnick singled out the cruise industry, alleging its use of foreign-flagged vessels lets it avoid paying U.S. taxes. Although a debate over how much the companies pay has been a headwind for more than a decade, those comments nonetheless led to knee-jerk selling.

Shares of Carnival Corp., Norwegian Cruise Line Holdings, and Royal Caribbean Cruises, had all fallen by more than 10% since those comments through the start of trading on Monday.

Lutnick's remarks were the last thing the market wanted to hear, given concern that consumers may be tightening their belts. If people focus on buying what they need, spending less on nonessentials, that would bode poorly for cruise bookings.

That said, investors needn't abandon ship. The latest selling follows years of superb performance by the stocks, so it may not signal widespread gloom. Royal Caribbean stock, for example, has more than doubled over the past year, meaning investors may have been primed to take some money off the table at any hint of bad news.

Moreover, there is no guarantee that anything will come of Lutnick's comments.

William Blair analyst Sharon Zackfia believes "the juice is not worth the squeeze as we estimate taxing the industry at full freight would bring in less than $2 billion of annual tax revenue versus annual federal government spending approaching $7 trillion."

UBS analyst Robin Farley likewise took a measured approach in terms of handicapping any real-world consequences. Given that cruise lines' current tax status came from legislation passed by Congress and signed by the president, it would need to be unwound in a similar way, not simply by an executive order or new Treasury regulation, she said.

Any changes would "likely be part of one comprehensive tax bill rather than many individual pieces of tax legislation, and given the narrow Republican majority in Congress plus the economic importance of the cruise industry to certain states such as Florida and Alaska, the outcome of any tax proposal is not assured, particularly given it would likely be part of a broader bill," she wrote Monday.

Farley calculates that at their prices before the open on Monday, shares of both Carnival and Norwegian both completely reflected the potential damage from a new tax scenario, while Royal Caribbean stock factored in almost all of the blow.

The market seems to agree about the risks. Stocks in all three major cruise lines were rebounding on Monday.

Farley's math has a 21% tax on cruises that touch U.S. ports translating into an 8% tax for Carnival, 10% for Norwegian, and 13% tax for Royal Caribbean. Those numbers aren't great, but they also wouldn't be crushingly burdensome.

Then there is the idea that what happens at sea stays at sea. The oceans are called international waters for a reason.

"While we view U.S. taxation of revenue generated in international waters as unlikely, we also believe tax-mitigation strategies could come into play in the event they are necessary, inclusive of potential reflagging of ships," wrote Zackfia. "Note that all the large cruise companies have full-time staff already dedicated to tax-mitigation strategies."

In short, investors should be aware that while new taxes are a possibility for cruise companies, they are hardly a done deal, and are largely reflected by recent stock moves. The more important factor is demand, which has remained strong, going by recent industry updates.

Put another way, the tax comments look more like an irritation than an iceberg.

Write to Teresa Rivas at teresa.rivas@barrons.com

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February 24, 2025 15:08 ET (20:08 GMT)

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