Let’s revisit cruise line stocks, which include Royal Caribbean ($RCL), Norwegian ($NCLH), and Carnival ($CCL).
These stocks are clearly trading inversely to US Covid-19 case counts, which makes sense in the short-term. Royal Caribbean also announced a $1 billion capital raise, which spooked the market, plunging all three stocks by around 10% a couple of weeks ago. A capital raise might indicate that management expects to need even more cash to get through the crisis, despite management comments about the (relative) resiliency of 2021 bookings. At the very least, it indicates additional dilution to existing shareholders.
Looking through the analyst models I have access to, it seems like they have enough liquidity to avoid bankruptcy if they recover to profitability over the next two years. But if they have to keep burning large amounts of cash for even 12 months longer than analysts are anticipating, that could put them straight back into Chapter 11 bankruptcy territory.
Analysts are focused on recovered earnings in 2022 and 2023, and most of them are actually forecasting higher cruise line EBITDA in 2023 than in 2019, expecting a return to growth mode within two to three years. While I agree this is entirely possible, how quickly cruise line bookings return and how sustainably they can operate without infections is also unknowable at this point. With so much uncertainty, we’d want cruise line stocks’ valuations to be extremely cheap to make these interesting.
Based on consensus 2023 EBITDA projections:
- $RCL trades at 7.6x 2023 EBITDA
- $NCLH trades at 6.0x 2023 EBITDA
- $CCL trades at 5.0x 2023 EBITDA
But Deutsche Bank research is specifically more contrarian and conservative, with about 13% lower EBITDA projections across the board, which would imply the following valuations:
- $RCL trades at 8.7x 2023 EBITDA
- $NCLH trades at 6.9x 2023 EBITDA
- $CCL trades at 5.7x 2023 EBITDA
These companies generally trade at about 8x to 11x EBITDA, which would represent a three-year upside of 60-80% if consensus estimates are right and 30-50% upside if Deutsche Bank estimates are right. But if they’re wrong and profitability doesn’t return in the next two years, it could very quickly swing to 50-100% downside risk. To summarize, you’re looking at a 60% to 80% upside versus a 50-100% downside, with no way to have any real conviction either way.
I believe the more likely scenario is they can return to profitability, and the stocks could generate some returns. Still, I am no pandemic expert and have very little conviction around this. In my eyes, this is an even bet that cannot be made with confidence – it’s essentially putting money on black or red at the roulette table. And that, my friends, is pure gambling, not investing, which is why I won’t touch these stocks.