Cruise line investors are probably feeling pretty good these days. Shares of Carnival (NYSE:CCL)(NYSE:CUK), Royal Caribbean (NYSE:RCL), and Norwegian Cruise Line Holdings (NYSE:NCLH) have soared between 47% and 71% since the start of last month. It's amazing what some favorable vaccine news can do for the hardest-hit travel niche.
All three stocks are still well below their highs, and, while anything is possible, it's probably not a smart bet that the three stocks will take out their earlier high-water marks. Let's go over some of the reasons why investors need to have realistic expectations here.
1. Share counts and debt levels matter
Carnival, Royal Caribbean, and Norwegian Cruise Line have had to print a lot of new stock and take on more debt just to stay afloat during the lull. There is no such thing as free liquidity, and it's probably not very encouraging to learn that a lot of the freshly minted shares were at price points well below where they are now. Despite the low-interest-rate environment we're in, cruise lines have had to offer beefy yields or dilutive convertible hooks to bait income-hungry speculators.
Over just the past two quarters we've seen Carnival's share count expand from 684 million to 721 million to 775 million. Norwegian Cruise Line has gone from 213.6 million to 239.3 million to 271.2 million on its weighted diluted outstanding shares over the past six months. Royal Caribbean has held up considerably better with a much smaller increase in its stock base, but we're still talking about 13% and 27% increases at Carnival and Norwegian Cruise Line, respectively, in just six months.
The outstanding stock tally will keep rising, too. More shares may not seem like such a big deal, but keep in mind that revenue and earnings will be that much lower on a per-share basis. Put another way, Norwegian would have to report trailing earnings 27% above earlier this year to report the same earnings per share. All three stocks will hit new market cap highs long before they hit stock highs, and that's bad news for shareholders.
Debt is also a tidal wave here. Norwegian Cruise Line began the year with a little more than $6 billion in long-term debt. Nine months later it's closing in on $10.5 billion. Carnival and Royal Caribbean have seen their long-term debt levels more than double this year. Interest expense eats away at a company's operating profit, leaving less behind for the bottom line, which we already know is being diluted into more shares.
2. We don't know when cruise ships will be back
Cruise lines keep pushing out their restart dates. Norwegian Cruise Line is now expected to resume sailings in March, but this date has been extended about a half-dozen times already. Carnival has unloaded some of its less productive vessels. All three cruise lines will be restricted to carrying a lot fewer passengers than they were before.
At some point in 2021 we will probably see cruise lines sailing out of the U.S. again. It's hard to fathom the industry surviving a pause into 2022. However, it will take a long time before the three players are back to entertaining the same number of passengers as a year earlier -- and the scary proposition here is that we don't know how long that will be.
3. We don't know when passengers will be back
If supply is a thorny issue, demand is no featherbed. The industry's biggest fans -- the ones who have had trips booked from mid-March of this year into early next year -- aren't happy. More than half of them have requested cash refunds instead of enhanced future cruise credit, and many might not come back even after the pandemic is a thing of the past. The global recession will inevitably pass, but that obviously is not helping right now.
Wooing first-time cruise customers will also be a challenge, given all the negative headlines this year describing cruise ships with their tight quarters as hotbeds of viral contagion. Customers will be back eventually. Cruising is too strong a value proposition with a differentiated edge over other forms of travel to die. However, it's going to take time that some shareholders don't have.