The ocean can play tricks on you. Sometimes if you spend too much time on a ship, you’ll start seeing things like mermaids, sea serpents, and — yes — even stock charts that aren’t what they appear to be. Carnival (NYSE:CCL), Royal Caribbean (NYSE:RCL), and Norwegian Cruise Line Holdings (NYSE:NCLH) have done a great job of staying afloat financially despite not generating any kind of meaningful revenue for more than 13 months.
It’s not all good news, of course. They are burning through gobs of cash. Cruise ships aren’t returning to profitable sailings anytime soon, and the fleets themselves have been streamlined. It will take time and good deal of marketing spend to sway anyone outside of hardcore cruise buffs to get on a crowded ship in the next couple of years. The near-term prospects will be challenging, but as long as you survive, you have a chance. Carnival, Royal Caribbean, and Norwegian Cruise Line have that chance, but it came at a dear price.
Walking the plank
Cruise lines have raised roughly $40 billion since suspending sailing in early 2020. We’re talking about dilutive stock sales at low price points. We’re talking about tacking on debt at the kind of interest rates you’d expect if you were lending money to a company that was shoveling dough into an incinerator.
All of this is necessary, and no one can argue otherwise. However, the bloated share count and expanding debt and interest payments doesn’t come cheap. Shares of all three cruise line operators are trading below where they were at end of 2019, but as a result of the minted stock and sandbags of debt, the same can’t necessarily be said about the enterprise value.
|Company||Enterprise Value Now||EV on 12/31/19||Difference||Stock Move|
|Carnival||$51.8 billion||$46.1 billion||12.4%||(45.2%)|
|Royal Caribbean||$38.6 billion||$38.7 billion||(0%)||(33.3%)|
|NCL||$19.9 billion||$19.0 billion||4.7%||(47.8%)|
Can you see the problem? Carnival, Royal Caribbean, and Norwegian Cruise Line shares have shed at least a third and as much as nearly half of the value they had at the start of last year. However, factor in all of the new debt and stock, and the enterprise value of all three are between flat to 12% higher than they were at the beginning of last year. The one thing you should know about cruise line stocks — the one thing — is that they are far more expensive than their stock charts suggest.
It’s a mind-boggling exercise, given everything that the industry has gone through. If you were to buy out all three cruise lines now it would cost you $6.5 billion more than before after accounting for the larger share count and assuming the new debt.
The valuation doesn’t make sense. Cruise lines will be back — some of them, anyway — but it will take years before they’re anywhere close to where they were heading out of 2019. These three businesses shouldn’t be trading anywhere near the enterprise values they were fetching under a rosier COVID-19-free scenario. These aren’t undervalued stocks, no matter what the mermaid, sea serpent, or misleading stock chart may have told you. Get off the ship, and start living just above the wavy surface. The deeper you dive, the scarier things get.
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.