Royal Caribbean (NYSE:RCL) will likely languish until there is a widely available vaccine for the novel coronavirus. RCL stock is going to be dead money until that happens.
Even assuming a vaccine is going to be produced by early next year, it may take a while before it gets to a critical population mass. That will be the trigger that will encourage large numbers of travelers to take cruises. (Norwegian travelers notwithstanding.)
But the problem is, can RCL survive that long?
Liquidity Questions
On July 16, the company said it would extend the suspension of its sailings until Sept. 30. I suspect that the halt could end up being extended again at least until the end of the year.
Royal Caribbean is going to announce its Q2 earnings and financial update on Aug. 10. What we know so far is that on June 9 the company closed on $1 billion in 9.125% senior notes due in three years. It also closed on $1.15 billion in 4.25% convertible notes also due in three years.
But as of May 19, the company had about $3.3 billion in liquidity. So the additional $2.125 billion brings the total liquidity to $5.4 billion. Moreover, the monthly cash burn runs between $250 million and $275 million. That works out to about $787 million per quarter.
So I expect by the end of July the company probably had about $4.6 billion to $4.7 billion in liquidity. That could last between five and six quarters at the company’s present burn rate. That means it can last until mid-2021. By that time, if RCL is not producing revenue and reducing cash burn, it will have to raise more debt or equity.
Implications for RCL Stock
So, again, everything depends on the availability of a vaccine widely available by mid-2021. This could be very tricky for RCL stock. For example, if by the middle of Q1 it appears that it going to take longer than expected to produce the vaccine and make it widely available, RCL will have to raise more debt or equity under distressed conditions. This assumes that quarterly cash burn is $780 million or so.
Even if it has to raise debt under these conditions, RCL stock will be lower. Shares might be much lower if the cash burn rate has not yet improved by then.
Nevertheless, I believe that the cruise ship operator will survive. It also implies that the RCL stock will fall and investors can wait to buy it at lower prices. I suspect the probability of that is high.
So if the introduction of the vaccine delays and if the company can’t lower its monthly and cash burn rate, this will be the fate of RCL stock. I can envision it lower by at least 50% or so, i.e., half of yesterday’s $48.71 a share.
Expected Probabilities
One way to analyze whether to invest in the stock is to put probabilities on various outcomes. For example, let’s assume there is a good possibility, greater than 50% — let’s say 60% — that RCL stock will be down by half in a year.
Let’s also assume that there will be a 30% possibility it will double in one year. Lastly, let’s say there is a 10% probability the stock will be the same. These three probabilities add up to 100%. Now let’s do the math:
- The first portion of this weighted sum would work out as 0.60 x 0.50 x $48.71 = $14.61
- The second piece would work out as 0.30 x 2 x $48.71 = $29.23
- The third is 0.10 x $48.71 = 49 cents
Altogether these weighted probabilities add up to an expected price for RCL stock of $44.33 in one year. At the recent $48.71 a share, the expected return is negative 8%.
Likely Next Moves
In other words, even though there is a great chance RCL stock could double in one year, the reality is it is more likely to fall.
You can change the probabilities, but I suspect that most people will use something close to my choices. Just make sure all the probabilities you choose add up to 100%.
Therefore, investors should probably wait to buy RCL stock until it is at least 10-15% lower than today. The way to do that is to average cost into the stock. Each quarter as the company announces earnings the stock is likely to move fairly quickly. Try to take advantage of lower prices during slumps in RCL stock.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
