Royal Caribbean survives cruise line storm best, but still beaten

Cruise lines ended a multi-day slippage on Tuesday as Carnival Corp. (CCL) (up 7.5%). Norwegian Cruise Line Holdings (NCLH) (up 8.3%) and Royal Caribbean Cruises (RCL) (up 7.7%) benefited from a market rally and possibly Carnival’s announcement of its intends to reach 75% of its operating capacity. at the end of the year.

Carnival’s planned return to sea significantly does not guarantee a rapid return to profitability, nor does it address the impact of the big steps he and other operators had to take to stay in the game, namely lifting capital and issue debt. These measures have changed balance sheets, increased the debt burden and diluted future earnings.

I took a quick look on Monday at how Norwegian Cruise Line’s capital structure has changed since the start of the pandemic. Today I will be reviewing Royal Caribbean.

Royal Caribbean has been the least affected of the three operators by the pandemic, at least in my opinion. The company has increased its outstanding shares by approximately 22%, from 209 million at the end of 2019 to 254.5 million currently. This increase was the least dilutive of the three when it came to raising capital, as Carnival’s stock count climbed 69% and Norwegian Cruise Line’s by 74%.

On the debt side, Royal Caribbean’s net debt (total debt minus cash) increased by about $ 5 billion, from $ 11.6 billion to $ 16.6 billion. By contract, Carnival more than doubled from $ 11 billion to $ 23 billion, while Norwegian Cruise Line grew from $ 6.8 billion to $ 8.9 billion.

Putting it all together, Royal Caribbean’s current enterprise value, or EV – market cap plus debt minus cash – is $ 35.5 billion. At the end of 2019, the EV stood at $ 39.3 billion.

The Royal Caribbean share price at the end of 2019 was $ 133.51; RCL closed Tuesday at $ 74.89. Reaching the equivalent EV at the end of 2019 would imply a current share price of $ 90. However, keep in mind that in 2019, Royal Caribbean earned almost $ 1.9 billion, or $ 8.95 per share. At this point, consensus analysts believe the company will return to profitability in 2022 with earnings per share of $ 1.74, followed by $ 6.51 in 2023.

There is no doubt in my mind that Royal Caribbean came out of the pandemic in the best of shape of the three. However, there seems to be a lot of optimism that the cruise industry will return to its glory days quite quickly. This pink image seems a bit premature as there are still a lot of unknowns and a lot could go wrong.

There are a few levels that investors should consider here. The first is the industry as a whole and how quickly it can get back to normal. Second, the condition of each of the major players, how long they can go on without raising more capital if optimistic forecasts for the industry are unrealistic, and how each will be affected by the steps taken to remain solvent during the pandemic.

It is not enough to look at a stock’s price and make comparisons to its previous trading level in situations where there has been massive dilution and increased debt.

I remain cautious overall.

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