At the start of the year, Royal Caribbean (NYSE:RCL) stock was fetching $135 per share. But that was essentially another era. Yesterday RCL stock closed at $36.88 after rallying since early April. Its market capitalization currently stands at $7.7 billion.
It’s true that the company has drawn on a $2.2 billion credit line and recently tapped a $2.2 billion 364-day secured term loan facility. The result is that Royal Caribbean has $3.6 billion of liquidity.
Yet those funds could dry up fairly quickly. In early April, JPMorgan cruise analyst Brandt Montour estimated that the company can survive for seven or eight months. No doubt, the fixed costs of maintaining 61 cruise ships are enormous.
But it’s important to keep in mind that there are large amounts of debt and contingent liabilities on the company’s balance sheet. According to InvestorPlace.com columnist Ian Bezek: “As of year-end 2019, the company had $4.5 billion of normal current liabilities. Those are expenses that are very difficult to push off for more than a quarter or two. That is, clearly, much larger than the company’s cash pile. On top of that, Royal Caribbean had $3.4 billion in customer deposits for upcoming voyages; the company may end up needing to refund much of that as well.”
The New Normal
Royal Caribbean recently extended its voyage suspension until June 11th. Its original plan was to resume cruising again on Apr. 11. As for the other cruise lines, Carnival Cruises (NYSE:CCL) expects to resume cruising again on June 26 and Norwegian Cruise Line (NYSE:NCLH) on May 14.
Even if these new timelines are not changed, the cruise industry will likely have to offer steep discounts and promotions to entice consumers to go on cruises.
How many people really will want to go on a cruise? There will still be fresh memories of the horrible incidents in which people on cruise ships had to be quarantined. Besides, these vessels are proverbial “floating petri dishes.”
In other words, many people may not be interested in taking cruises until there is a vaccine for the novel coronavirus, which could easily take a year or so.
After all, taking a cruise is discretionary and generally requires some planning. There are also other ways to vacation, like taking a car trip or staying at a resort. Perhaps taking a flight may be viewed as safer, as passengers have to spend much less time on an airplane than on a cruise ship.
And the Center of Disease Control and Prevention (CDC) has announced that cruises should not set sail until July 24 unless the Secretary of Health and Human Services says that COVID-19 no longer constitutes a public health emergency or the CDC Director rescinds or changes the order.
The Bottom Line on RCL Stock
While airlines received assistance from the federal government, the cruise lines may not be as fortunate. That’s because the cruise lines have their headquarters overseas and consequently are not currently permitted to borrow money from the federal government. Congressional Democrats have indicated that they are not willing to lift that restriction.
Unfortunately, given the heavy cash burn rate of Royal Caribbean, it will probably need to raise more capital, potentially by selling stock. That would certainly meaningfully lower the value of its shares.
Or, if it sells more debt, its borrowing costs will be high. Carnival agreed to a hefty 11% annual interest rate, even though its balance sheet was fairly strong.
So all in all, it’s tough to make a bull case on RCL stock. Granted, the shares could rally once or twice, but those rallies will probably be short-lived.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.