After its shares nearly doubled from year lows, Royal Caribbean Cruises (NYSE:RCL) is attracting bulls because of its recently improved financial liquidity. After raising billions through a private equity offering, markets are less worried that the cruise ship operator will face any bankruptcy risks.
All that matters in the near-term is its business surviving through the novel coronavirus lockdown. If the world eventually conquers the pandemic by containing its spread, tourism will once again flourish. That scenario bodes well for RCL stock. And those buying shares now are betting on an eventual rebound a few months down the road.
RCL Stock’s $3.32 Billion Benefit
On May 13, RCL priced $1 billion worth of notes due in 2023 for 10.875%. Its $2.32 billion aggregate principal amount of 11.5% notes are due in 2025. The company said that it will use the net proceeds to repay a term loan agreement worth $2.35 billion. Even though the company is paying very high interest rates, reduced risks of a bankruptcy remove another unknown that previously hampered its share price.
Moody’s downgrading the ratings of Royal Caribbean unsecured notes did little to hurt its stock. The ratings agency cited the continued suspension of its operations and expectations of a slow business recovery as the reasons for the lowered rating. Further, it forecast that “cruise operations will continue to be suspended in the U.S. beyond the current July 24 no-cruise order issued by the Centers for Disease Control and Prevention (CDC) and available capacity will be modest for the remainder of 2020 and possibly into early 2021.”
The company should expect increased costs related to adding more safety protocols to protect its staff and its passengers. Also, just as airlines face potential restrictions on maximum capacity loads of 67% for flights, cruise ship operators may have occupancy limits, too. Implementing social distancing on the cruise ship will hurt RCL’s revenue and its profitability.
Watch Airlines First
Before RCL’s business may rebound, investors should watch the airline business first. Assuming the economy fully re-opens in the weeks or months ahead, the tourism rebound will play out if strong airline passenger traffic grows. If consumers are still wary of flying, then RCL should expect a very slow recovery in cruise ship bookings.
In the preliminary first-quarter report, Royal Caribbean posted revenue of $2 billion, beating the $2.02 billion expectation. It reported cash burn at $250 million to $275 million. Administrative expenses are in the range of $150 million to $170 million. Importantly, the company has enough liquidity for at least the next 12 months.
Speculators betting that lockdowns will be over by next year will get rewarded investing in Royal Caribbean now. The world is filled with retirees eager to travel the world on a boat. Besides, if travelers risk virus exposure in another wave of Covid-19, the medical system worldwide will be ready for it. Hospitals and airports may have screening, temperature checks, and excess personal protective equipment. This will lower the risks of spreading the virus during the flu season next year.
Valuation and Your Takeaway
Analysts offering a 12-month price target on RCL stock think the shares are worth $68.33 a piece on average (per TipRanks). This bullish target — 66% above current levels — coincides with the stock’s strong value, growth, and quality score on Stock Rover. Below is a sales forecast for Royal Caribbean:
|Sales Growth Next Year||56.90%||33.90%||11.20%|
|Sales 1‑Year Chg (%)||10.70%||-1.10%||18.20%|
|Sales 3‑Year Avg (%)||8.50%||6.00%||12.40%|
|Sales 5‑Year Avg (%)||6.50%||5.20%||6.50%|
Data Courtesy of Stock Rover
Conversely, investors who forecast a mixed revenue growth outlook will come up with a fair value of ~$42.00. In a 5-year discounted cash flow model: revenue exit, assume revenue falling this year and then rebounding in fiscal-year 2021:
|(USD in millions)||Input Projections|
|Fiscal Years Ending||19-Dec||20-Dec||21-Dec||22-Dec||23-Dec||24-Dec|
|% of Revenue||30.50%||-1.20%||23.70%||30.70%||28.10%||28.10%|
Data courtesy of finbox
Admittedly, the strong revenue growth rebound in 2021 depends on tourists eager to travel, restrictions fully lifted worldwide and the virus no longer spreading around the world. These assumptions are a lot to ask for but it is not beyond the realm of possibility.
Chris Lau, contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, the author did not hold a position in any of the aforementioned securities.