While February may seem like a lifetime ago, it was actually only about three months ago when Royal Caribbean (NYSE:RCL) reported earnings. The company delivered $8.95 in earnings per share (EPS) and predicted 2020 earnings would come in even higher at $10.40 to $10.70 per share.
The company did acknowledge that the coronavirus was not being accounted for in those numbers. But at the time, while disruptions seemed possible, our current reality did not seem plausible. This was a company that recorded nearly $2 billion in profit while introducing a plan to more than double that by 2025.
Now, all cruises have been stopped for an unknown amount of time and Royal Caribbean has gone from thriving to struggling to survive. It's a worst-case scenario that has the company scrambling for answers and looking for liquidity.
What is Royal Caribbean doing?
In its year-end earnings report, the cruise line acknowledged the coronavirus but did not really address it:
As previously announced, the Wuhan Coronavirus and the efforts to contain it are expected to negatively affect our results. While we expect this to be temporary, the situation is highly fluid and the overall impact cannot reasonably be estimated at this time. Accordingly, our guidance does not include any provision for the impact of the outbreak.
A little less than six weeks later, Royal Caribbean voluntarily suspended all cruises. It has since extended the date of its suspension until June 11 -- although that date is really just a wish, since the Centers for Disease Control and Prevention (CDC) has halted all cruising from U.S. ports through late July.
There are scenarios under which the CDC order can be lifted. They are not easy ones for the cruise line to meet:
- The expiration of the Secretary of Health and Human Services' declaration that COVID-19 constitutes a public health emergency;
- The CDC Director rescinds or modifies the order based on specific public health or other considerations; or
- 100 days from the date of publication in the Federal Register.
On the positive side, this order does give Royal Caribbean some guidelines as to what needs to happen for it to reopen. The negative, of course, is that none of those three conditions are likely to be met anytime soon.
That has left the cruise line with essentially no revenue and the continued expense of maintaining its ships. The company has furloughed many workers, cut expenses where it can, and "entered into a $2.2 billion 364-day secured term loan facility, further enhancing the company's liquidity position," according to a press release.
It can extend that loan for a second period of 364 days if it needs to, giving the company $3.6 billion in liquidity. Royal Caribbean also noted in the press release that it has financing in place for all of the new ships it has ordered.
"This is a period of unprecedented disruption for the cruise industry," said CFO Jason T. Liberty in the press release. "We continue to take decisive actions to protect the company's financial and liquidity positions as they enable us to keep focused on our guests, our crew, and our long-term plans."
Will Royal Caribbean survive?
Before the coronavirus pandemic, this was a profitable company that paid a $0.78 per share dividend on April 6. That was a reasonable decision as Royal Caribbean was making money, looked to be making more, and had the cash it needed for operations and expansion.
This was a very profitable company, and it's likely to be one once again. The problem is that it could take months or even years for some form of normal to return. Even if cruising happens this summer (maybe with extensive testing before people can board), prices are depressed and many consumers simply won't want to take a cruise (especially older folks, who are core customers for the industry).
Royal Caribbean could face a cash crunch, and while it should be able to find people to lend it money, that cash will likely come at a steep interest rate. The cruise line should be able to survive the crisis, but a strategic Chapter 11 bankruptcy -- one that wipes out shareholder equity -- remains possible.
This is a risky investment even at the stock's current prices. A recovery seems likely, but the exact path to that makes buying shares a calculated risk. If you are prepared to hold, there is a significant upside, but you have to remember that falling to zero remains possible.