What happened
Shares of Royal Caribbean Cruises (RCL 2.27%) sank 25.3% in May, according to S&P Global Market Intelligence. The cruise ship operator posted a bad first-quarter earnings result and is still feeling the ramifications of the pandemic. As of this writing, shares are down 27.7% this year.
So what
On May 5, Royal Caribbean released its first-quarter earnings report. Revenue was $1.06 billion in the period, and there was a loss per share of $4.57. Both numbers were below analyst expectations for the period, causing the stock to sell off in the days after the report.
Image source: Getty Images.
Investors are likely not happy with how much cash Royal Caribbean is burning right now. With its fleet still not fully operational and inflationary pressures from fuel, equipment, and labor costs, it is tough to be a cruise operator at the moment.
In the first quarter, the business burned almost $2 billion in free cash flow, or around how much cash is on the balance sheet right now. If this continues, Royal Caribbean is going to run out of cash soon and will need to tap the capital markets and raise money through debt or share issuance.
The problem is that the company already has a ton of debt on its balance sheet. According to its 10-Q, Royal Caribbean has $23 billion in total long-term debt, with $2.56 billion due this year. This will be tough to pay off, especially considering that before the pandemic, the company never generated more than $2.5 billion in free cash flow in a year. And with interest rates steadily going higher, the cost of all this debt will likely go up if and when management is forced to refinance.
Now what
With the stock down so much, Royal Caribbean now trades at a market cap of $14 billion. Add back its long-term debt, and its enterprise value sits at $35 billion. This might seem reasonable given that Royal Caribbean generated solid free cash flow before the pandemic threw everything into chaos.
But investors have to ask whether we will ever get back to that easy operating environment. The company is hemorrhaging money, will be hurt by rising interest rates, and could have a liquidity issue coming up if it can't refinance its debt. There are plenty of solid, well-run companies to invest in with the market down right now. It doesn't look like Royal Caribbean is one of them.
