This Analyst Warns Cruise Investors: A Full Recovery Is Still “Several Years” Away

America’s up-again, down-again group of cruise line stocks — Carnival Corporation (CCL), Royal Caribbean (RCL), and Norwegian Cruise Line Holdings (NCLH) — went down again, en masse, this week, with all three companies’ stocks sinking 10% or more.

Don’t say you were not warned.

Analyst Chris Woronka of Deutsche Bank penned a note in which he tweaked price targets ever so slightly higher. At the same as he did this, however, Woronka also warned investors that none of the three publicly-traded cruise stocks is currently cheap enough to buy.

Although Woronka raised his estimates (the price target on Carnival going from $11 to $13 a share, Royal Caribbean going from $36 to $40, and Norwegian Cruise from $11 to $15), the analyst remained firmly on the fence about all three of these companies, and reiterated a “hold” rating on all three stocks. Turns out, while in the long term Woronka sees the three major cruise stocks recovering after getting torpedoed by the COVID-19 panic, it could be several years still before things start to look better for them.

So, how precisely does Woronka seeing this situation playing out?

First, the background. COVID-19 has done a number on the cruise stocks, first by frightening potential customers away, and later by making it utterly impossible for passengers to cruise, even were they so inclined, because of a “no-sail” order implemented by the Centers for Disease Control to prevent further spreading of the coronavirus. For the past several months therefore, cruise companies have had no revenue at all coming in. A recent announcement by the Cruise Lines International Association (CLIA), declaring that no cruise line will resume sailing before September 15 at the earliest, means there probably won’t be any revenues coming in for another three — or more — months.

To survive this situation, cruise lines have been cutting costs wherever they can. Woronka believes that, because cruise lines need to continue cutting costs, and are also forecasting a decline in demand for their services, it’s likely that the cost cutting will result in cruise lines both postponing deliveries of cruise ships they’ve already ordered, and also selling off some of the ships they already have.

Woronka believes that these ship sales will both generate cash (e.g. $3 billion in Carnival’s case) that cruise companies can use to live on while confined to port, and also result in smaller, more efficient fleets by the time things start to recover two or three years from now. By the time 2023 rolls around, the analyst forecasts that Carnival, for example, will be operating a fleet 20% smaller than its current fleet. Royal Caribbean’s fleet will be 8% smaller, and Norwegian’s, 7% smaller.

Smaller fleets are easier to fill up quickly with passengers, such that by 2023, Woronka believes that Carnival, for example, will have “net yields” (ships sailing with all cabins full) 3% higher than it enjoyed in 2019. And because fleets will be eliminating their older, less profitable ships, he also predicts EBITDA profit margins will improve at all three cruise lines.

That’s the good news. Now here’s the bad: In addition to selling old ships, cruise lines have also been taking on boatloads of new debt in order to raise the cash they need to remain solvent while confined to port. In total, Carnival, Royal Caribbean, and Norwegian Cruise are estimated to have taken on about $16 billion in new debt since the pandemic broke, while raising only about $1 billion in cash through share sales.

Even at low interest rates, Woronka estimates that all this debt will add about $1.3 billion in annual interest expense at the cruise lines, thus siphoning off money that would otherwise drop to the bottom line, and depressing 2023 earnings per share by anywhere from 23% to 30% at all three cruise lines.

So long story, short? Yes, cruise lines will recover, and several years from now, when coronavirus is only a distant memory, cruise ships will probably be back to sailing at full capacity. Because of the measures the cruise lines had to undertake to survive to see that day, however, each and every one of these cruise stocks is going to be significantly less profitable — which is why Deutsche Bank can’t recommend buying any of Carnival, Royal Caribbean, or Norwegian Cruise Line stocks today.

Using TipRanks’ Stock Comparison tool, we lined up the three alongside each other to get an idea of what the analyst community has to say about the long-term growth prospects of these cruise line players.

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