December 23, 1999

American Classic Voyages Co.

Ticker: (Nasdaq: AMCV)
Phone: 312-258-1890
Price (12/22/99): $34 1/2

By Rick Aristotle Munarriz (TMF Edible)

How Did it Double?

Anchors aweigh! Domestic cruise operator American Classic Voyages has taken off for exciting ports of call like "takeover speculation" and "capital appreciation." The trip has been smooth and Dramamine-free as an improving cruise industry and sector consolidation have helped prop up valuations on the high seas.

For the once-troubled cruise operator, life has gotten better since Sam Zell bought up the company from worried insurers in 1992. While the two original sister ships -- the SS Independence and the SS Constitution -- have been separated (the Independence continues its weekly jaunts through Hawaii while the Constitution sank in the Pacific as it was being towed to an Asian junkyard for scrap metal back in 1997), the family has grown. Acquisitions and now a pair of boats on order have helped bulk up American Classic's potential in a growing leisure cruise sector.

For investors, those who were fortunate enough to hop on board before the ship pulled away, this might very well fell like The Love Boat. Despite owning a stake in a company with lower earnings on anemic sales growth there is nothing as forgiving as belonging to an industry that is in demand. How does that saying go exactly? That all ships rise with the tide?

Business Description

American Classic is the largest owner and operator of United States flag-flying cruise vessels. Its SS Independence takes to the Hawaiian Islands while its fleet of three authentic paddlewheel steamboats (Delta Queen, Mississippi Queen, American Queen) coast through the American heartland.

The company acquired the Delta Queen Steamboat business in 1994. On December 9, 2000, the company will launch the revival of the United States Line as it transforms Holland America's Nieuw Amsterdam into its own ms Patriot. The boat will join the Independence in taking on Hawaiian Island itineraries.

Financial Facts

Income Statement
12-month sales: $200.3 million
12-month income: ($0.2 million)
12-month EPS: $0.00
Profit Margin: N/A
Market Cap: $676.2 million

Balance Sheet
Cash: $70.8 million
Current Assets: $83.4 million
Current Liabilities: $92.4 million
Long-term Debt: $74.1 million

Price-to-earnings: N/A
Price-to-sales: 3.4

How Could You Have Found This Double?

Back in the early 1950s, a young and then undiscovered actress posed for the initial promotional shoot for the Constitution. A few years and movies later, Grace Kelly sailed on the same Constitution on her way to becoming the bride of Prince Rainier of Monaco. The Constitution, and her identical Independence, packed that kind of celebrity wallop. Presidents and movie stars came aboard. The ship became a star herself in the tissue-ready An Affair to Remember.

But times change. Patrons demand more. It is why bigger ships with more frills continue to roll off the dry-docks. From 1968 to 1974 both ships were in lay-up -- with nowhere to go despite their colorful history of Transatlantic travel. A few years later, with Hawaiian tourism booming, both ships caught a break. In Hawaii it was the tropical ports and not the amenities that ruled the itinerary.

History doesn't end there, of course. Zell's history doesn't end there either. As a real estate magnate, Zell approaches REITs with a "bigger is better" philosophy. He translated that mindset into the American Classic playbook too. Just two years after taking over the Hawaiian cruiseliner, the company purchased Delta Queen Steamboat. It made sense to diversify since the Hawaiian tourist industry explosion of the 1980s was fading away like a Magnum P.I. rerun. The unique steam-powered paddleboats came with higher sales per berths than the Hawaii sailings.

With the company ordering up a pair of new U.S.-flagged ships to revive the United States Line fleet, American Classic expedited the process when it bought the Nieuw Amsterdam from Holland America. Why wait until 2003 when a few renovations in an older ship can set things in motion by next December?

While not exactly a threat to cruise giants like Carnival (NYSE: CCL), it was clear that American Classic was growing. In a sector, like this one, where the smaller players offer attractive financials that are actually accretive to earnings, the buyouts can be contagious. And, no, an investor should never buy into takeover hype. However, if the attention drawn to the sector was legitimate, as was the case here, the path ahead melts away the icebergs.

Where to From Here?

The Patriot won't be the only new move for American Classic in the coming year. The Columbia Queen will begin coasting through the Pacific Northwest -- a departure from the company's Mississippi River stronghold.

Estimates have been falling as the company has struggled with the bottom line this year. Closing out a breakeven 1999 with projections calling for $0.18 a share next year may not offer much near-term hope. The most recent share price run-up came on the heels of Carnival's unsolicited bid for Norwegian Cruise Lines. NCL's insistence that the offer was too low, only to go out and sell a stake in the liner elsewhere, played right into American Classic's speculative camp. The industry valuations went higher and American Classic was considered one of the alternate brides.

For investors, the time calls for the same kind of patience and practice of an Independence passenger trying to learn the Hukilau. While American Classic's insistence on remaining domestic gives the company the additional burden of taxes (which are minimal for its non-domestic peers like Carnival), the company is a unique player. That kind of originality doesn't get sold for scrap metal only to go under in transit.

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