I appreciated the response to Wednesday's column on Norwegian Cruise Line (NCLH) . In the piece, I raised some concerns with valuations, and the possibility that investors are overlooking a great deal. Ironically, NCLH was up more than 7% Thursday, which increased the market cap, and hence enterprise value by $500 million.
One reader pointed out to me another angle on the cruise line industry, that being competition. In the best of times, it was incredibly competitive. If you've cruised in the past several years, you no doubt recall the "freebies" the major lines were offering in order to attract passengers, including drinks, internet, more upscale dining, etc.
Fast forward to the pandemic, and we really don't know what demand and capacity will look like once the cruise lines are again fully operational. Cruising had become an extremely popular and cost-effective way to take a vacation, but it is unclear how quickly folks will want to return to it post-pandemic. That could ramp up the competition for passengers.
Today we'll take a look at Carnival Cruise Lines (CCL) . Not unlike Norwegian, Carnival has raised a great deal of capital in both the debt and equity markets in order to see it through the pandemic. The shares closed 2019 at $50.83, and have since fallen nearly 60%. Since year-end 2019 (November fiscal year end), the company has increased shares outstanding by 88 million, or about 13%, and more than doubled debt, from $11.5 billion to $24.4 billion.
Market cap as of November 2019 was $31 billion; adding debt of $11.5 billion, and subtracting cash of $500 million yields an enterprise value of $41.95 billion. Keep in mind, that year, CCL generated $20.8 billion in revenue, and earned $3 billion, or $4.32 per share.
CCL's current market cap is $23.2 billion, adding debt of $24.4 billion, and subtracting cash of $8.2 billion yields an EV of $39.4 billion. (The company just announced preliminary Q4 results, indicating cash of $9.5 billion, and a burn rate of $600 million/month, for the purposes of this column, I am using last quarter's cash balance).
To get to the 2019 year-end EV of $41.95 billion would require a share price just above $23. In other words, all else being equal, CCL at $23 would put the current EV, and year-end 2019 EV at about the same level. The share price at fiscal year-end 2019 was $45.08.
Markets, in my view, may be painting an overly rosy picture for CCL; a much heavier debt load, could constrain the company. CCL sold 19 ships since the pandemic began, which has helped with liquidity, but could constrain revenue to some extent. Consensus estimates are calling for a loss of $3.05 per share in 2021, and a return to profitability to the tune of $0.52 per share in 2022.
I am scratching my head over this one; markets appear to be overlooking the risks and current valuation for CCL, but time will tell.
Have a nice weekend!
