If you're rolling the dice at the cruise-line stock casino, you know the risks. You can lose it all if Carnival (CCL -2.77%) (CUK -2.54%), Royal Caribbean (RCL -3.42%), or Norwegian Cruise Line Holdings (NCLH -2.65%) buckle the bankruptcy belt, but you also know that there's a lot of upside if things go right.
The three stocks have fallen 75% to 81% from their January highs. They would have to at least quadruple to revisit their recent peaks, but let's not be too greedy here. We've seen what happens when folks on floating casinos get cocky. Let's go over what it would take for the stocks to double (a healthy haul over a couple of years) even if it's just half of where the three stocks were three months ago.
Before we start paying you off on this double-or-nothing bet, let's go over the reasons it will take several years to more than quadruple. Getting back to where the industry was financially in 2019 isn't going to happen in the next couple of years. Carnival, Royal Caribbean, and Norwegian aren't going to revisit their January highs or their trailing earnings for some fairly good reasons:
- Demand won't be there because of the negative headlines scaring away potential first-time passengers.
- An oversupply of berths will be an issue, and that's going to weigh on the industry's pricing elasticity.
- Even if operating profits bounced back, all of the debt that the cruise lines have taken on these past few days (and in Carnival's case, the new shares) will eat away at earnings per share.
The good news is that the industry players are beginning to talk about ways to start making money sooner rather than later. Carnival's CEO, on a Thursday call with journalists, pointed out how the world's largest cruise line could start sailings out of China soon. Where the sailings would go until other markets start embracing social gathering remains to be seen, but it's a start. Carnival has mentioned that it has roughly $1 billion in monthly liquidity needs in a scenario where all of its ships are out of service, so even getting a couple of ships going in healed foreign markets can only help.
The cruise lines aren't going to have access to the U.S. government's bailout package, but it's not out of the question for the players to tap into European government stimulus packages, given the large number of employees from the region. No matter how that scenario plays out, the three players have each been raising billions to make sure that they can make it through the next few treacherous months.
Let's talk about valuations. They are ridiculously low right now. Even if all three stocks doubled, they would be fetching a trailing earnings multiple in the single digits. It's easy to see why the cruising stocks trade at a discount to the market on a trailing basis. The next couple of quarters will be brutal. But every analyst sees Royal Caribbean and Norwegian bouncing back into profitability come 2021.
The news isn't all good, naturally. All three stocks have seen their Wall Street profit targets for 2021 cut roughly in half over the past three months, and those numbers should continue to shrink as more analysts update their models.
There are also reports that the cruise lines will try to honor social distancing on sailings by limiting passengers to exterior cabins with access to fresh air or booking every other cabin on ships to space people out. The rub here is that this isn't a multiplex that can get away with sub-50% capacity. It's not cheap to run a cruise ship.
Thankfully a lot of the uncertainty is already baked into the battered stocks. Forget the past. Looking out to next year, the stocks are trading between four and six times 2021's profit outlooks. We already know that the estimates will keep inching lower and the multiples higher. But if the stocks double from here, we're talking about next-year profit multiples in the single digits for Royal Caribbean and Norwegian, and the pre-teens for Carnival (if the players can somehow manage to live up to current consensus forecasts).
Investor sentiment may take a long time to come around. Cruise line stocks remain one of Wall Street's biggest victims in the coronavirus crisis. But with folks finally starting to talk about the steps necessary to reopen the economy, the same headwinds that slammed Carnival, Royal Caribbean, and NCL can whip around and become tailwinds.