Cruise line operators ended a multiday skid on Tuesday as Carnival Corp. (CCL) (up 7.5%). Norwegian Cruise Line Holdings (NCLH) (up 8.3%) and Royal Caribbean Cruises (RCL) (up 7.7%) benefitted from an up day in the market and likely from an announcement by Carnival that it plans to be at 75% of operating capacity at year-end.
Carnival's planned return to the seas in a meaningful way does not guarantee a quick return to profitability nor does it address the impact of the great measures it and other operators had to take to stay in the game, namely raising capital and issuing debt. Those steps have altered balance sheets, increased debt burdens and diluted future earnings.
I took a brief look on Monday at how Norwegian Cruise Line's capital structure has changed since the onset of the pandemic. Today I will review Royal Caribbean.
Royal Caribbean was the least affected of the three operators by the pandemic, at least in my view. The company increased shares outstanding by about 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 share count climbed 69% and Norwegian Cruise Line's soared 74%.
On the debt side, Royal Caribbean's net debt (total debt minus cash) increased by about $5 billion, from $11.6 billion to $16.6 billion. By contract, Carnival's more than doubled from $11 billion to $23 billion, while Norwegian Cruise Line's rose from $6.8 billion to $8.9 billion.
Putting it all together and Royal Caribbean's current enterprise value, or EV -- market cap plus debt minus cash -- is $35.5 billion. At year-end 2019, EV was $39.3 billion.
Royal Caribbean's share price at the end of 2019 was $133.51; RCL closed Tuesday at $74.89. To get to the equivalent EV as of year-end 2019 would imply a current share price of $90. However, keep in mind that in 2019 Royal Caribbean earned nearly $1.9 billion, or $8.95 a share. At this point, consensus analyst estimates see the company returning to profitability in 2022 with earnings per share of $1.74, followed by $6.51 in 2023.
There's little doubt in my mind that Royal Caribbean has come out of the pandemic in the best shape of the three. However, there seems to be plenty of optimism that the cruise industry will return somewhat quickly to its glory days. That rosy picture seems a bit premature as there are still a lot of unknowns and much that could go wrong.
There are a couple levels investors need to consider here. First is the industry as a whole and how quickly it can return to normal. Second is the condition of each of the major players, how long they can continue without raising more capital if rosy forecasts for the industry are not realistic and how each will be affected by moves made to stay solvent during the pandemic.
Looking at a stock's price and making comparisons to where it previously traded is not enough in situations where there has been massive dilution and increased debt.
I remain cautious overall.
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