Let's face it, the cruise line business isn't going to be returning to anything near normal anytime soon. North American cruises have already been canceled through mid-September at the earliest, and given the pace of COVID-19 growth in Florida, where most of the industry is based, even that might be too soon to set sail.
Carnival (CCL 0.10%), Royal Caribbean (RCL 0.57%), and Norwegian Cruise Line (NCLH -0.95%) all did a good job of raising money to make it through the pandemic early in their shutdowns. But that cash is going to be burned quickly, and even when operations are going again, there's less and less left for shareholders. Given the dilution and added debt companies have taken on, I don't think this is a business that's set up for long-term success for shareholders.
Image source: Getty Images.
Shrinking upside
When companies raise money to keep their businesses afloat, there's a downside for long-term investors. If the company raises debt, it has to make money to pay off that debt. If the company sells equity, it dilutes existing shareholders and lowers their long-term upside. Carnival has done both, and as the largest cruise line company, it's the one I'll focus on first to show that investors have priced in a very optimistic future.
In early April, Carnival issued 71.9 million shares of stock, increasing its shares outstanding by 11% to 756 million shares. It also issued $1.95 billion of 5.75% convertible senior notes due in 2023, and $4.0 billion of 11.5% for first-priority senior secured notes due in 2023. This is on top of drawing $2.8 billion from its $3.0 billion credit facility. The cash was needed, but it comes at a cost long-term and should affect how we value the company.
If we look at how this affected the company's enterprise value (debt plus equity) from pre-COVID-19 to today, it's shocking how little of its value has been lost.
| Metric | Value as of early 2020 | Value Today |
|---|---|---|
| Market cap | $29.4 billion | $13.0 billion |
| Debt | $11.9 billion | $20.7 billion |
| Enterprise value | $41.3 billion | $33.7 billion |
Source: Company press releases and SEC filings.
Put all of this together, and Carnival's enterprise value has only fallen 18% despite operations being closed for six months and a very uncertain future in late 2020 and 2021. That's not even accounting for the fact that some debt sold carries with it an astronomical interest rate of 11.5%.
Further reducing upside is the fact that six ships are expected to be disposed of or leave the fleet in the next 90 days. That'll reduce the amount of earnings potential the company has when operations reopen.
While operations are down, Carnival expects cash burn to be $650 million per month. None of this looks good, yet Carnival's enterprise value hasn't been affected like you might think.
Royal Caribbean is all risk
Royal Caribbean has taken a different approach, using debt exclusively to raise funds. It has taken on $7.7 billion of new debt and also increased its credit facility by $550 million. This is on top of $9.6 billion of debt on the balance sheet at the end of 2019. When added to its market cap falling from $24.2 billion at the end of January to $10.8 billion today, its enterprise value has fallen just $5.7 billion to a total of $28.1 billion.
Meanwhile, cash burn is expected to be $250 million to $275 million per month while operations are suspended. So, cash is going out the door despite investors only valuing the company 17% less today than before the pandemic.
Same story at Norwegian Cruise Line
Norwegian Cruise Line has raised $1.9 billion in debt and sold 78.2 million shares of stock since the pandemic began. This increases its shares outstanding by 36% and increases debt outstanding from $6.8 billion to $8.7 billion.
| Metric | Value as of January 2020 | Value Today |
|---|---|---|
| Market cap | $11.5 billion | $5.0 billion |
| Debt | $6.8 billion | $8.7 billion |
| Enterprise value | $18.3 billion | $13.7 billion |
Source: Company press releases.
You can see that, using the same metrics we used for Carnival, Norwegian Cruise Line's enterprise value is down just 25% since the pandemic began.
Cruise line stocks may never be the same
Just take a step back and ask yourself how much less you think cruise lines should be worth today versus early in 2020 before the pandemic was even a consideration. 25% less? 50% less? Maybe more?
It's shocking to see that cruise line companies have only seen their enterprise values fall between 16% and 25% during the pandemic. And that's on top of the fact that they're a lot riskier today, with debt that can reach well into double-digit interest rates.
I think the cruise line business will be in shambles for years, along with many travel-related consumer discretionary stocks. And investors are far too optimistic about a rapid recovery. This isn't an industry I would be investing in today.
