Cruise Lines Pare Back Spending, Tap Excess Liquidity
Shares of Carnival, Royal and Norwegian are undervalued and could remain depressed until the coronavirus passes.
As a result of the coronavirus, both narrow-moat firms Royal Caribbean (RCL) and Norwegian (NCLH) have tapped the credit markets for incremental liquidity in recent days. Revolving credit was increased by $550 million at Royal and $650 million at Norwegian, helping allay investor concerns that a near-term liquidity crunch could lead to balance sheet uncertainty. While Royal said it would preserve cash by reducing capital expenditures and operating expenses to improve liquidity by another $1.7 billion in 2020, Norwegian articulated its ability to temper marketing spend, general and administrative costs, and discretionary capital expenditures to weather the storm. Although narrow-moat Carnival (CCL) hasn’t upped its liquidity position, it ended its fiscal year with $12.5 billion available ($182 million of cash, $2.8 billion of untapped revolving credit, and $9.5 billion in export credit facilities).
Royal also tabled its full-year outlook for $10.40-$10.70 in EPS, excluding the $1.20 per share impact expected from the coronavirus (noted in the firm’s 10-K). We had already reduced our 2020 EPS estimate to $7.15 to account for softer global demand, including 4% yield declines. We had also made a similar shift in our Norwegian forecast, which initially indicated the coronavirus would take a 300-basis-point bite out of its 2%-3% expected yield growth, implying flat to negative as-reported yield performance in 2020, rendering full-year 2020 EPS of $4.65-$4.85. Like Royal, we surmised Norwegian yields will be further compressed by continued headline risk, falling around 3% in 2020, leading to EPS around $4.15. In our opinion, Carnival faces the same struggles, and as such, we recently lowered our yields to include a 4% decline and our earnings per share to fall 24%, to $3.35. Our FVEs for Carnival, Royal and Norwegian of $55, $120 and $60, respectively, indicate the cruise firms are undervalued. We caution investors that until the coronavirus passes, shares could remain depressed.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.