Few industries have been as battered as the cruise lines in recent weeks. This week's rally in some of the market's hardest hit stocks still finds Carnival Cruise Line (CCL 3.40%) (CUK 3.79%), Royal Caribbean International (RCL 6.67%), and Norwegian Cruise Line (NCLH 1.49%) trading 69% to 72% below their 52-week highs as of Wednesday's close.
Low trailing earnings multiples and chunky yields make this a midnight buffet for income and value investors, but there's a lot more to sizing up the cruise lines than a look back. This isn't 2019 anymore. Ships aren't leaving the ports anytime soon, and even when the industry gets the all-clear at the other end of the coronavirus crisis, it's going to be a hard sell to get passengers back on board in the near term.
The next few quarters will be brutal for the industry. You can't make money if you're not generating any revenue. The narrative has gone from how cheap these once-insanely profitable cruise lines were to how many months they can last without filing for bankruptcy. Analysts feel that Carnival, Royal Caribbean, and NCL have at least five to six months of liquidity available before they need to raise capital to stay afloat.
Things look grim, and investors attracted to the beefy payouts may get burned. Carnival and Royal Caribbean are yielding 12.9% and 7.4%, respectively, as of Wednesday's close, but it's just a matter of time before those distributions get reduced, if not nixed entirely. Any bailout will likely mandate an end to shareholder distributions in the near term, and even if they're able to squeeze through this on their own, they're going to have to save every penny they can until business gets back to normal.
It will take some time to get things right. Don't base the industry's near-term outlook on the current analyst consensus. The average estimates call for earnings to decline in 2020 before bouncing back in 2021, but that's only because a lot of Wall Street pros haven't updated their forecasts. Most of the recent analyst updates call for all three cruise lines to post large deficits this year. Every analyst sees Carnival, Royal Caribbean, and NCL returning to profitability in 2021 -- for now -- but even that view is still padded by folks on Wall Street that have yet to revise their projections.
Let's look at Royal Caribbean to illustrate the pitfalls of basing a buy decision on consensus profit targets. The average earnings estimate for Royal Caribbean in 2021 is $8.56 a share, and picking up the world's second largest operator for five times next year's bottom-line showing sounds pretty sweet, at first. However, there are old and now obsolete estimates as high as $12.20 a share in that mix. Some of the more recent updates find Royal Caribbean earning as little as $1.33 a share in 2021 after losing more than $3 a share this year.
Wall Street forecasts will fluctuate, and they could get worse. Even when the sailings start again, we still don't know the legal liabilities of botched sailings and the reputational hit the industry will take given some of the horror stories of some quarantined journeys. Consumers won't be as anxious to book cruises next year as they were just a few months ago, and that's before even considering the strong likelihood of a global recession that will haunt the travel industry.
It will probably take several years for Carnival, Royal Caribbean, and NCL to revisit their highs, but that's not necessarily a bad thing. These stocks would now have to more than triple to get back their peaks, and under kinder climates they may be able to beat the market in the next couple of years on the way there. The risks have never been higher for these stocks that are not as cheap as they seem, but the bar has also never been lower to come through with market-thumping returns.