I continue to follow the plight of the cruise industry with much interest. I hope the industry can revive once the pandemic is in the rearview mirror. I'm not sure we've ever had an industry in near complete shutdown mode as long as this one. Yet the markets appear to be looking forward, through all of the damage, and ignoring how much the capital structures of the cruise lines have changed as they fight to survive.
Let's focus on Norwegian Cruise Lines (NCLH) . NCLH has issued sizable amounts of both debt and equity since the pandemic began. Shares outstanding have increased from 215 million at the end of 2019 to the current 315 million. Debt increased from $6.8 billion at the end of 2019, to nearly $11 billion as of the most recent quarter end (Q3 September). Since then NCLH raised an additional $850 million in debt. Cash was higher than normal at the end of Q3 ($2.35 billion), however, some dry powder to fund cashflow needs.
The best way, in my view, to put this all together for an apples-to-apples comparison, before the pandemic and now, is via Enterprise Value or EV (market Cap - cash + debt). Investors too often focus on stock price alone in order to judge whether it is cheap or not. However, we need to take a broader view, incorporating the entire capital structure, and changes made to it, and EV does that.
NCLH closed 2019 at $58.41, and had a market cap of $12.6 billion (215 million shares outstanding). Subtracting cash of about $250 million, and adding debt of $6.8 billion, gives an EV of $19.2 billion. Just to add some color, that year NCLH had $6.46 billion in revenue and earned $930 million, or about $4.30/share. Granted, December of 2019 may or may not be the best basis of comparison for NCLH, but hopefully the point will be clear nonetheless.
Fast forward to now and NCLH has a current market cap about $7.75 billion based on the current 316 million shares outstanding. I believe that some outlets are using an older share count that does not reflect the most recent equity offering, and are thus showing a lower market cap. While the share price is down 58% since year end 2019, the market cap is down just 38%, due to the secondary offerings. With debt at an estimated $11.75 billion now, a $7.75 billion market cap and cash estimated at $3.5 billion ($2.35 billion as of 9/30/20, plus $800 million in equity issued in November, plus the $850 million in debt issued in December, less an estimated $500 million in cash used in the fourth quarter), the current enterprise value is about $16 billion. That figure is not that far removed from the $19.2 billion EV of year-end 2019 - similar EV, but a drastically different company.
And therein lies the issue for NCLH stock. In order to get back to an $19.2 billion EV of year-end 2019, for instance, all else being equal, would imply a stock price of about $34.50/share. That would put the current and year-end 2019 EV on equal footing, and given the changes in the capital structure, the price/share is much lower. Not to mention the fact that we really don't know when the cruise line industry will be back to normal, how much more cash will be burned in the process, and what earnings will look like, even in the best case, and the effects of shareholder dilution.
From $58.41/share in December 2019 to $24.52 as of Tuesday does not tell the whole story for NCLH. I do hope, however, that NCLH, and the other cruise lines will be safely able to operate soon, and will be able to weather this storm.
I may explore Royal Caribbean (RCL) and Carnival (CCL) on a similar basis in future columns, especially if there's any Real Money reader demand to do so.
