Royal Caribbean: Don't Go Down With the Ship

Before the Covid pandemic erupted, the three major publicly traded cruise companies were posting outstanding earnings. Prospects appeared bright. Capital was deployed in building newer and better ships. But after Covid, cruise lines were prohibited from sailing for over 18 months. Virus-related masking, vaccine requirements and passenger fear for their safety onboard made for sparsely populated ships, even after the firms were again permitted to operate. Few businesses could weather shouldering huge ongoing expenses with no revenues for that length of time. Cruise ship maintenance all by itself was a major negative. Royal Caribbean is the best of the bunch, yet it still reported a major loss in the end of March quarter as detailed below. There was news from the industry that future bookings are looking strong. That pushed the trio of cruise operators, Carnival , Royal Caribbean and Norwegian Cruise Line Holdings shares up big first thing in the morning on Tuesday. Those upturns didn't last long. Why try to guess short-term trading moves when the underlying companies are looking really dicey? Why are they so bad as long-term plays? Getting through the pandemic required huge equity dilution via issuance of new shares. It also forced enormous debt issuance on top of already levered balance sheets. Managements had no choice. The U.S. government did not offer paycheck protection program loans to these companies as they were domiciled overseas. The optics of sending taxpayer funds to non-U.S. firms was not favorable. The only choices available were the proportions of debt to equity being issued. Without major new funding all three cruise companies would have been bankrupt by now. Selling equity meant there would be no repayments needed, at the cost of future dilution of earnings per share if and when profitability returned. Taking on billions in new debt avoided that problem, but ramped up debt service costs tremendously from pre-pandemic levels. RCL added the lowest percentage of new shares while adding almost 120% more debt. CCL tripled its total debt while adding 65.3% more shares outstanding. NCLH split about evenly with 82.4% more debt and 82.3% more shares. Understanding the negative effects of those money raises is easy when you look at the RCL's chairman's comments in the Barron's interview below. Annual debt service expense is now $1.1 billion to $1.2 billion vs. $300 million to $400 million in 2019. That sucks up about $4.50 per share in cash flow before consideration of ever paying down any principal. The CEO's assertion that RCL can return to pre-Covid profit levels before long appears to be a pipe dream meant to calm his investors. After creating the graphic above, RCL drifted down to a new 2021-2022 nadir of $60.07. Analysts now see this year's loss approaching $5 per share necessitating further borrowing and/or share issuance. Will RCL become cash flow positive in 2022 or 2023? I think that is unlikely. The latest full page report on RCL from Value Line (Apr. 29, 2022 issue) listed the firm's financial strength as C. Unlike grade school, though, which uses A through F grades, the only financial strength below C is D for default. Value Line's earnings predictability ratings run from five (lowest) to 100 (highest). At the 10th percentile, Royal Caribbean's says that any and all analyst opinions are merely best guesses that could be wildly off from actual future results. Owning any of the three major cruise companies is a total crapshoot as to whether they can turn cash flow positive before running out of money. It is not yet clear that any of them can do so. Resist the urge to speculate on their survival. Even if they do, it might take a full decade to revert back to a semblance of fiscal health. Today's beaten up markets offer great chances to own very profitable names at rock bottom valuations. Buy some of those instead, and use the ultimate gains from their recoveries to pay for your next cruise.

Royal Caribbean: Don't Go Down With the Ship

All of the major cruise lines are suffering from their own form of long Covid, and they largely lacked a government lifesaver. Here's why even the best of the businesses looks like a sinking stock ... for now.

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