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Royal Caribbean Stock: Treacherous Seas Ahead
Stock Analysis & Ideas

Royal Caribbean Stock: Treacherous Seas Ahead

Royal Caribbean (RCL) is a global cruise company. It operates global cruise brands: Royal Caribbean International, Celebrity Cruises, Azamara and Silversea Cruises. 

I am bearish on RCL stock. (See Royal Caribbean stock charts on TipRanks)

The Perfect Storm

COVID-19 was the perfect storm for the cruise industry for several reasons.

First, when the pandemic began, some cruise liners were literally stuck on the water when ports denied them entry. At one point there were thousands of seafarers stuck on water, or in foreign lands.

In the spring of 2020, the entire industry was forced to shut down overnight.

Unlike some entertainment or travel related attractions, it is nearly impossible to socially distance aboard a cruise ship. While restaurants can at least open at 50% capacity, this is not practical for cruises.

To make matters worse for shareholders, the major cruise lines, like Royal Caribbean, are not domiciled in the United States (this in order to take advantage of tax havens).

While this may have seemed a good strategy at one point, it prevented the industry from receiving the same billions of dollars in bailout money that the airline industry and others received. The industry was on its own.

Company Takes on Water

Revenues plummeted in fiscal 2020, falling an astounding 80% to just $2.2 billion from $10.9 billion in 2019. Then to only $93.4 million in the trailing 12 months from the June 30, 2021 report. Operating losses were in the billions each quarter since the shutdown.

With no place to turn, Royal Caribbean did the only thing it could do to stay afloat: issue shares and take on billions in long-term debt. This will need to be paid before shareholders ever see a reasonable return on their investment in the form of dividends or share buybacks.

Long-term debt has risen 90% since December of 2019. What was an already rather steep $8.2 billion is now well over $20 billion. Even when running at full throttle in 2019, Royal Caribbean was not clearing $2 billion in net income. It will takes years to get out from under this anchor of debt.

Value is Not Enticing

One would think that with all of these negative metrics, the stock would be trading at a significant discount. Perhaps investors could bet on a turnaround story and be handsomely rewarded.

However, this is not the case. While the shares of RCL stock are trading 31% lower than in December 2019, the market cap is only 16% lower than it was then.

How can this be? The company issued many shares during the pandemic, and the diluted share count has risen 21% over this time. Even though the share price has dropped, the slice of company pie that each share represents is also smaller.

For the record, Royal Caribbean had $20.7 billion in long-term debt, including the current portion due, and $234 million diluted shares outstanding at June 30, 2021.

This means that each share owns a whopping $11.54 of the debt outstanding. If this is added to the share price, any discount is virtual nil.

Investors are getting a damaged product, but not a clearance price for it.

Wall Street’s Take

Wall Street analysts are somewhat bullish on RCL stock, with two Buy, three Hold, and no Sell recommendations. The average RCL price target of $96.25 implies 5.7% upside.

Summary

The COVID-19 pandemic was devastating to the cruise industry. It will take years, or decades, for Royal Caribbean to fully recover.

Further, this is without discussing the impact that another, more contagious, variant could have on plans to resume sailing.

Massive debt, a larger share count, an uncertain future, and shares that are not discounted enough to warrant the risk make this investment decidedly unattractive.

Disclosure: At the time of publication, Bradley Guichard did not have a position in the securities mentioned in this article.

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