2020 was a crazy year for Royal Caribbean (RCL -3.26%) stock, featuring a 78% plunge between February and March as coronavirus took hold, and ending with a full-year loss of about 44%. But there's a silver lining for investors: Buy Royal Caribbean stock now, and if the share price just goes back to where it was a year ago, you will nearly double your money.
Or so the thinking goes.
And that may be thinking right.
Consider: Royal Caribbean carries a current market capitalization of $17.3 billion. Over the five years preceding the pandemic, Carnival averaged profits of about $1.5 billion per year, according to data from S&P Global Market Intelligence. If you assume that at some point in the future, things will get "back to normal" for Royal Caribbean (and I do), then the stock currently costs just 11.5 times normalized earnings.
That's barely one-third of the 30 price-to-earnings (P/E) ratio that the stock averaged over the last decade. So, theoretically at least, Royal Caribbean stock could close to triple once things get back to normal.
The bigger question is how long a return to normal will take, and whether Royal Caribbean has enough cash to survive until cruising resumes, so it can start earning those "normal" profits again.
This is not an academic question. Just last week, Royal Caribbean sold the last batch of stock it was authorized to sell. After running the numbers, I estimate it currently holds only about $4.2 billion in cash and is burning through that cash at the rate of $270 million per month. At this rate, Royal Caribbean may have as little as 15 months left before it needs to either sell even more stock or take out more loans.
Can Royal Caribbean get its boats back in the water before the money runs out? The best estimates I've seen suggest cruising in the U.S. won't start up again before April or May, and even those cruises will be of limited duration and with limited passengers on board. We can't really expect a full return to normal until vaccines have been widely distributed across the U.S., and experts aren't expecting that to happen before summer.
If I had to guess, I'd still bet business gets back to close-enough-to-normal in time to save Royal Caribbean -- but they're cutting this close. I wouldn't rule out the possibility of another round of dilutive stock issuances happening before then.
And this is why, of the three major cruise line stocks, I see the least potential for profit in Royal Caribbean.