I've written a lot about the plight of Carnival Corp. (CCL) and my belief that the stock price had gotten ahead of itself. It looks like investors have focused solely on Carnival's stock price relative to where it used to trade as the basis for believing the shares are undervalued instead of considering the increase in the company's enterprise value via equity and debt issuances that have made big changes to the capital structure. Those changes will impact Carnival's ability to generate the bottom lines it has had in the past. The increase in interest expense alone will be monumental.
To that end, I have been asked about the other cruise line operators, namely Royal Caribbean Cruises (RCL) and Norwegian Cruise Line Holdings (NCLH) , and how their capital structures were affected. First off, the reason I focused on Carnival was my belief that it was the most damaged and challenged of the three, but indeed, all have had to raise cash to stay alive.
We'll focus here on Norwegian Cruise Line, which saw its shares outstanding climb from 213.2 million at year-end 2019 to 369.9 million at the end of the latest quarter. That's a 74% increase and it is massively dilutive (Carnival's shares outstanding increased 69%).
In 2019 for instance, NCLH earned $4.33 a share. Based on the current share count and assuming the same net income as 2019, earnings per share would be $2.51. As simple as it seems and obvious as it is, when you are spreading income over a substantially larger amount of shares you've got dilution; however, such an increase in shares is often overlooked by investors.
Norwegian Cruise Line also somewhat modestly (under the circumstances, anyway) increased net debt by about $2.1 billion during the same time frame to $8.9 billion (Carnival's net debt more than doubled to about $23 billion). Norwegian Cruise Line's current enterprise value, or EV -- market cap plus debt minus cash -- is $17.45 billion. At year-end 2019, EV was $19.2 billion. The share price at the end of 2019 was about $58; NCLH closed last Friday at $23.14. To get to the equivalent EV as of year-end 2019 would imply a current share price of just under $28. However, keep in mind that in 2019 the company earned $933 million, or close to peak earnings. At this point, consensus analyst estimates see the company returning to profitability in 2022 with earnings per share of 39 cents, followed by $2.43 a share in 2023.
Expectations remain high for Norwegian Cruise Line and the other operators at this point; however, we still don't know when the cruise industry will be back to full capacity and whether there will be further hiccups along the way.
In my next column I'll take a look at Royal Caribbean.