There is no way to describe Royal Caribbean Cruises’s (NYSE:RCL) year without including the words “devastatingly poor.” The coronavirus has brought RCL stock to its knees. In the first quarter of this year, the shares delivered a total return of -75%, more than double the loss of the U.S. stock markets as a whole.
Looking back at the cruise line’s financial situation before and after the Great Recession will give investors some perspective on what to do during the current crisis.
A detached look at the past shows that Royal Caribbean can overcome the current obstacles it faces. It might provide you with the information you need to determine if its shares are a good value play or a value trap.
Where to Begin?
Royal Caribbean’s stock hit a low of $5.40 on Mar. 3, 2009. On Mar. 9, the S&P 500 bottomed, starting the longest bull market in U.S. history. A year later, Royal Caribbean was trading at almost $25. A year after that it had almost doubled. In two short years, Royal Caribbean’s stock had increased by 789%.
I’m not suggesting trying to time the bottom of RCL stock. I’m merely pointing out that the financial firestorm that was the financial crisis didn’t put the company in the ground. It battled back.
While it seems impossible to think that Americans will return to cruise ships after what many have been through in various ports around the world, people are creatures of habit. They like what they like. The cruise sector might not return to normal for 12 months or even 24 months, but it will eventually bounce back.
InvestorPlace columnist Brad Moon recently pointed out that few people remember the 2014 norovirus outbreak on Royal Caribbean’s Explorer of the Seas. The virus made 700 of the ship’s passengers sick.
The words “this time is different” come to mind.
This phrase was first uttered by legendary investor John Templeton way back in 1933, describing the tendency of investors to conveniently forget that history repeats itself. Sure, every situation brings new wrinkles to the table, but generally, we’ve pretty much seen this story before. Those with the courage to go against the grain will profit greatly.
I just don’t see people giving up cruising. Maybe I’ll be proven dead wrong, but I doubt it.
Royal Caribbean’s Financial Situation Then and Now
Interestingly, while Royal Caribbean’s stock cratered during the Great Recession, its business didn’t. In the years 2010, 2009, and 2008, it had annual revenue of $6.75 billion, $5.89 billion, and $6.5 billion, respectively. Considering the economy had fallen into the toilet during those three years, the cruise sector barely lost a step.
In an October 2008 interview, CEO Richard Fain was exceptionally optimistic about the future.
“They [customers] look at the value of a cruise versus a land holiday, and the more they look, the better off we are,” Fain stated at the time.
“Discounting will affect our business, but we have the ability to do more and offer more to our guests and that will serve us well in the long term.”
While I’m not a fan of cruises — despite getting married on one — I can see the allure. Multi-generational families can take a trip together without having to worry about the logistics of visiting three or four different places on the trip. And even though cruises have gotten more expensive as ships have become more amenity-filled, they are still a great way for large groups to enjoy a trip together.
On Mar.. 23, Royal Caribbean announced that it had obtained a $2.2 billion, 364-day secured term loan facility that can be extended by an additional year, if needed. It has drawn down the entire amount to handle the downturn in its business. Between the cash on its balance sheet and its existing revolving credit facility, it has $3.6 billion of liquidity to help it cope with the downturn.
“This is a period of unprecedented disruption for the cruise industry,” said Jason T. Liberty, the company’s executive vice president and CFO. “We continue to take decisive actions to protect the company’s financial and liquidity positions as they enable us to keep focused on our guests, our crew and our long-term plans.”
Royal Caribbean currently pays out a 78-cent quarterly dividend that is yielding 10.7%. In 2019, it paid out $602.7 million of dividends and made $100 million of share repurchases. I think it’s safe to assume that if travel bans and at-home restrictions remain in place past the end of April (which is very likely), the company won’’t return any money to shareholders for the remainder of 2020 and possibly into 2021.
Investors absolutely can’t count on the dividend at this point. Cruise ships cannot be maintained on a shoestring budget, but all the major cruise operators have enough access to loans to get them through the current crisis.
“There is meaningful cash burn as the ships are idle. But I do think these companies all have strong support from their banking groups,” Deutsche Bank analyst Chris Woronka told Barron’s recently.
“You would prefer to have some operation during the peak summer period, but it’s unknown exactly what that’s going to look like. You’re going to scale back into profitability. It’s not a switch where you go from zero to normal. It’s going to be a process to build back to profitability, but it starts with getting some sailings going again.”
If you go back to 2009, when the company had its lowest net income in the past decade, it still made $162 million on $5.89 billion of revenue. A decade later, Royal Caribbean had $1.9 billion of net income from $11 billion in sales. Its net margin went from 2.8% in 2009 to 17.3% in 2019.
Let’s assume that Royal Caribbean’s revenues will drop by 40% and its net margins will fall back to 2009 levels. That would mean $6.6 billion of sales and net income of just $185 million.
While its free cash flow would go from positive to negative, the company would still be making money.
The Bottom Line on RCL Stock
Richard Fain has been the CEO of Royal Caribbean for 32 years. Back in 1988, when he took the helm, the company had annual revenue of just $520 million. In 2019, its profits were almost four timesits 1988 sales.
He’s seen the company through the Great Recession, 9/11, the Dot.com bubble, and many other more minor incidents.
I believe if anyone can get Royal Caribbean through the crisis, it’s Richard Fain. That’s why I called Royal Caribbean one of seven stocks to buy on coronavirus weakness.
This year is not going to be pretty for Royal Caribbean’s shareholders. But history shows that there is light at the end of the tunnel.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.