Royal Caribbean outlasts Storm cruise line, but still gets battered

Cruise lines ended Tuesday with a multi-day slip as Carnival Corp. (CCL) (+7.5%). Norwegian Cruise Line Holdings (NCLH) (+8.3%) and Royal Caribbean Cruises (RCL) (+7.7%) benefited from a higher day in the market and likely an announcement from Carnival that it plans to 75% of operational capacity at the end of the year.

Carnival’s planned return to the sea in a meaningful way does not guarantee a quick return to profitability, nor does it address the impact of the major steps it and other operators had to take to stay in the game, which is to raise capital. and issuing debt. Those steps have led to changes in balance sheets, higher debt levels and diluted future income.

I briefly reviewed on Monday how Norwegian Cruise Line’s capital structure has changed since the start of the pandemic. Today I will be reviewing Royal Caribbean.

Royal Caribbean was, in my opinion, the least affected of the three operators by the pandemic. The company increased the number of outstanding shares by approximately 22%, from 209 million at the end of 2019 to the current 254.5 million. That increase was the least dilutive of the three when it came to raising capital, as Carnival’s shares climbed 69% and Norwegian Cruise Line’s 74%.

On the debt side, Royal Caribbean’s net debt (total debt minus cash) increased by approximately $5 billion, from $11.6 billion to $16.6 billion. Under contract, Carnival’s revenue has more than doubled from $11 billion to $23 billion, while Norwegian Cruise Line’s has increased from $6.8 billion to $8.9 billion.

All told, Royal Caribbean’s current enterprise value, or EV – market capitalization plus debt minus cash – is $35.5 billion. At the end of 2019, the EV was $39.3 billion.

Royal Caribbean’s share price was $133.51 at the end of 2019; RCL closed at $74.89 on Tuesday. Getting to the equivalent EV from the end of 2019 would imply a current stock price of $90. Keep in mind, though, that Royal Caribbean made nearly $1.9 billion in 2019, or $8.95 per share. According to consensus analyst estimates, the company will return to profitability in 2022 with earnings per share of $1.74, followed by $6.51 in 2023.

I have no doubt that Royal Caribbean has emerged from the pandemic in the best shape of the three. However, there seems to be a lot of optimism that the cruise industry will return to its glory days somewhat soon. That rosy picture seems a bit premature as there are still many unknowns and a lot can go wrong.

There are a few levels that investors should consider here. First, there’s the industry as a whole and how quickly it can get back to normal. Second is the condition of each of the major players, how long they can go on without raising more capital if rosy forecasts for the industry are not realistic and how each will be affected by measures to remain solvent during the pandemic.

Looking at a stock’s price and making comparisons to where it traded before is not enough in situations where there is massive dilution and increased debt.

I generally remain cautious.

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