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Here's the Crazy Way Cruise Line Stocks Could Get Back to All-Time Highs

By Billy Duberstein - Dec 7, 2020 at 6:31AM

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So you're saying there's a chance...

The stock market has been booming ever since the November election and the announcement of a highly effective coronavirus vaccine. Among the stocks ripping higher, cruise line stocks have led the pack, with major cruise lines Carnival ( CCL 1.17% ), Royal Caribbean ( RCL 2.81% ), and Norwegian Cruise Lines ( NCLH 0.80% ) each surging materially higher over the past month.

CCL 1 Month Total Returns (Daily) Chart

CCL 1 Month Total Returns (Daily) data by YCharts

Yet after each company's epic one-month rally, it appears a "return to normal" in cruising is already priced in. After running the numbers recently on Carnival, Royal Caribbean, and Norwegian, it appears all three stocks are pricing in a return to former levels of operating income, as well as a return to their historic P/E ratios.

Of course, all three stocks remain far below their all-time highs, since each company has taken on mountains of high-yield debt and issued stock at low prices just to raise cash to survive the no-sail period.

Yet while the upside seems capped from here, there's a peculiar way the cruise stocks could potentially -- with a big emphasis on "potentially" -- make their way back up toward their all-time highs.

A young couple with suitcases against a blue background. The woman points to something in the distance.

Image source: Getty Images.

Using the stock as currency

No doubt, the intrinsic values of each company has been permanently damaged by the coronavirus. But just as each company's capital markets activity has hurt their share prices, it's the capital markets that could be the key to getting back to pre-COVID levels.

As all three stocks have surged materially off their lows, each major cruise company has announced an equity raise within the last month. Carnival just raised $90.4 million more in equity at a price of $17.59 on November 23. Royal Caribbean just opened an equity distribution agreement to sell up to $1 billion of stock in the open market, as of Dec. 3. And Norwegian recently raised just over $800 million in equity on Nov. 17 at $20.80 per share.

Usually, when a company dilutes shareholders to raise money, the stock price goes down. Yet with the exception of Royal Caribbean, which just announced its equity raise on Friday, both Carnival and Norwegian's stocks are about 30% higher than when management thought it advantageous to sell stock.

And therein lies how these stocks could -- with a strong emphasis on "could" -- continue to move higher.

A higher stock price equals a higher value?

Today, the cruise line companies' stock prices aren't just important to investors -- they're also important to the companies themselves, since all three are using their stock as currency to raise cash.

That means the higher their stock prices go, the "cheaper" their equity cost of capital. Theoretically, if the stock price goes high enough, and therefore the cost of equity low enough, these companies can continue selling their stock to pay off their tremendous debt loads and lower their interest burdens.

This leads to a theoretical paradox. The higher that public market investors bid the stock, or the more "overvalued" each company's stock price gets, the more money each company can raise through equity offerings to pay off debt, which could actually increase each company's intrinsic equity value. It's a strange case of a higher stock price that leads to a higher value, not just reflecting value.  

Should these stocks keep shooting higher, despite my conclusion that they are fully valued or overvalued right now, it could lead to virtuous cycle whereby the higher the stock price goes, the more valuable the company is! It's a chicken-and-the-egg problem that is a nightmare on the way down, but a ray of hope when the stock is going up.

It may not get these stocks all the way back, but it could get them closer

To be sure, each cruise stock still has a long ways to go in order to reach previous highs. Royal Caribbean has made about half of its way back to all-time highs, but Carnival and Norwegian are still about two-thirds lower than their previous highs, despite their incredible month-to-date rally.

CCL Chart

CCL data by YCharts

And despite their recent equity raises, all three companies are still more heavily indebted than they were prior to the crisis, and all have more shares outstanding. So while an increasing stock price could boost the value of all three cruise lines higher than what might have been thought possible just one month ago, it's unlikely these three stocks go high enough to raise enough money to pay off all their new debt without material dilution.

However, in this skyrocketing market, never say never.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Royal Caribbean Cruises Ltd. Stock Quote
Royal Caribbean Cruises Ltd.
RCL
$69.89 (2.81%) $1.91
Carnival Corporation Stock Quote
Carnival Corporation
CCL
$18.16 (1.17%) $0.21
Norwegian Cruise Line Holdings Ltd. Stock Quote
Norwegian Cruise Line Holdings Ltd.
NCLH
$20.22 (0.80%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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