Royal Caribbean (RCL) is poised for tremendous growth in 2021 and 2022. Demand for cruises has skyrocketed, with bookings for 2021 surging in demand. Royal Caribbean is offering multiple discounts for cruisers which further encourages consumers. Royal Caribbean is the best positioned major cruiser for the post-pandemic era in the industry due to its strong balance sheet, fleet makeup, and public opinion. The company’s joint ventures will recover in tandem with the cruise industry recovery, will bring Royal Caribbean to the top of the line of cruisers.
Royal Caribbean is the second larger cruiser in the world. They own and operate 61 ships with their partner brands sailing to 1,000 destinations on all 7 continents. Their partner brands include Celebrity Cruises, Azamara, and Silversea Cruises. Locations are concentrated in the Caribbean, Asia, and Australia during the Northern Hemisphere’s winter weather. Royal Caribbean and its subsidiaries have capacity for approximately 149,320 berths across all ships. There are 17 ships on order, expecting to enter service from Q3 2021 through Q3 2024; totaling 55,300 berths.
I wanted to include the performance of Royal Caribbean to emphasize the steady growth for the pre-pandemic period. After the volatility subsides, I believe the company will have the same steady growth for a prolonged period of time (unless there is another pandemic of course).
Recent Financial Summary
During Royal Caribbean’s most recent earnings call for the period ending June 30, CFO Jason Liberty broke down the financials for Q2. Royal Caribbean reported a net loss of $1.3 billion, with cruise costs declining by net 60% versus last quarter, due to voyage suspension.
The importance of liquidity for companies is something Royal Caribbean has taken aggressive steps to ensure. The cruiser ended the quarter with approximately $4.1 billion of liquidity, raising $6.5 billion in new liquidity since suspending operations. This amount of cash places Royal Caribbean in a very strong position for future impacts and the continuing impacts of the pandemic. Although cash burn is estimated to be $250-$290 million each month, bookings for 2021 have averaged more than doubled during the first 8 weeks of cruise suspension. Liberty also commented on how surprised leadership is, considering there is not marketing, or advertising is being done. After including rebooking with credits, more than 60% have been new bookings. This shows extreme demand, even with the current environment. 2021 is looking up for Royal Caribbean, and the cruise industry in general. As of right now, all Q3 sailings have been cancelled, but the cruiser has enough cash to sustain its operations.
It is also important to note that Michael Bayley, the CEO, mentioned the possibility of sailings in China and Australia resuming before October. The reality that leadership sees this as even a possibility shows that the cruise industry may resume operations and return to profitability sooner than once first thought. The makeup of the cruisers booking has largely been younger customers and loyalty customers with volume from prospective cruisers depending on the pandemic status of the state in which they live in. All in all, Royal Caribbean’s recent financials did not look good, but they are promising.
Cruising is well established in North America, Europe, and Australia. It is a developing sector in multiple other emerging markets, giving cruisers room to obtain market share in the future.
According to Royal Caribbean’s 10-k for FY19 as shown above, there are low penetration rates for the general population, and as time goes on, it is likely that with social media and the seamlessness of information dissemination, Royal Caribbean will be profiting well from new customers. North America accounted for 47% of global cruise guests, 25% Europe, and 24% Asia/Pacific, respectively. Cruise guests up until the pandemic had been increasing YoY for a steady rate. I strongly believe this YoY increase will continue beginning in late 2021, as cruisers and the general public become more comfortable with the current environment.
Large competitors for Royal Caribbean in the industry are Carnival Corporation (CCL), Norwegian Cruise Line Holdings Ltd. (NCLH), and Disney Cruise Lines (DIS). The entire industry has been suffering due to the pandemic but will reach back to its pre-pandemic glory fairly soon after ships begin cruising in my opinion. Italy, for example will begin cruising on August 29.
According to CruiseCompete.com, they have seen a 40% increase in their 2021 bookings compared to 2019. An analysis from a UBS analyst found that in the past 30 days the number of cruise bookings for 2021 are up 9% compared to the same period in 2020. This largely is made up of new cruises rather than re-bookings from canceled trips. Given the current environment, I think this is a metric of consumer confidence in the cruising industry and demand. The bank also found that 76% of people who canceled their cruise accepted credits toward future purposes, which means that Royal Caribbean will eventually receive this revenue-most likely soon. I would like to add that Royal Caribbean has substantially reduced marketing and advertising costs, so for bookings to increase at the current rate, it shows to me that there is a large amount of pent-up demand.
A Harris Poll released on March 31 showed that only 22% of respondents said it would take “a year or longer” before they’d get on a cruise again. Although this study doesn’t apply to the entire population of the United States, I thought it was important to show the majority of people are ready to begin cruising soon.
Royal Caribbean Group has a 50% joint-interest of TUI Cruises and Hapag-Lloyd Cruises, owns 49% Non-Controlling Interest of Pullmantur Holdings S.L., and owns 66.6% of Silversea Cruises- which historically was 33.33% but recently acquired 33.33% from Heritage Cruise Holding Ltd. The company also owns Azamara, Celebrity Cruises, and of course Royal Caribbean. This diversification is necessary in this day and age. The ability to have stakes in cruise lines globally allows for the spread of risk, and considering Royal Caribbean gets most of its revenue from North America, these global partnerships will bring more market share.
Suspension for Royal Caribbean’s global brands have been extended through at least October 31, 2020, excluding China and Australia. Management has said that the company will be reducing CapEx, furloughing staff, and cutting operating expenses. They have also been issuing debt like crazy- trying to raise liquidity. The company has announced that they will also cut dividends until they feel they are stronger financially and have ridden out the period of the pandemic.
Although they are taking on a lot of debt, the company has states that they are in a position where their cash reserves could sustain operations for over 10 months. I think the pandemic frenzy will subside far before the end of this timeline.
One of the main risks is, of course, the pandemic. If there are subsequent waves and no vaccine widely available, the cruise industry will have to lengthen suspension timelines. Cash burn would become rapid and if there wasn’t sufficient liquidity, Royal Caribbean would face the possibility of bankruptcy. However, it is predicted that a vaccine will be identified in October, and the majority of the population will be vaccinated by early 2021. Royal Caribbean has already identified that they have enough cash to sustain the burn until late 2021, but I do not think the cruiser will have to see this become a reality.
Due to the fact that Royal Caribbean is not incorporated in the US so as to bypass taxes and other costs, the company was excluded from the $2 trillion economic stimulus package. However, Royal Caribbean was able to raise ample funds to increase liquidity and should be in a strong position regardless of receiving no money from the stimulus. However, the company has been able to increase liquidity and raise tons of debt to sustain themselves for a prolonged period.
There is also a seasonality and weather risk that persists, but as I mentioned previously Royal Caribbean has strategically laid out plans to combat this, such as having global operations for year-round sailing.
In a world with no pandemic, I may have opted to do a DCF valuation as the company has consistently been cash-flow positive with steady levels. However, due to the disruption, I believe a comparable analysis would be best-considering that the entire industry is suffering, and this may be the time for competitors to obtain each other’s customers with the right strategies.
I chose Carnival Corporation (CCL), Norwegian Cruise Line Holdings Ltd. (NCLH), and Disney (DIS) for this analysis due to the similarity of operations and size of the companies; as they are all the largest players in the industry. Disney is the only outlier here due to the diverse nature of its operations and not just focusing on the cruising industry.
Source: Author (Data from Seeking Alpha, SEC Filings, and TD Ameritrade)
As the chart shows, the P/E ratio for all of these companies have been heavily skewed due to the major loss on earnings per share for the last quarter. However, Royal Caribbean is below the median, which makes for an attractive investment opportunity. They are well below the debt/equity ratio-possibly skewed by Disney’s metric, but nonetheless still below Norwegian’s. The current ratio is also above Carnival’s, which places Royal Caribbean in a better short-term position to pay off their liabilities.
I opted for leverage and liquidity ratios due to the current environment. Profits are negative for the industry, so I didn’t think those types of metrics would be useful in the analysis. Royal Caribbean seems to be in a good position relative to its competitors, and I think it will become the best major player as we sail out of this pandemic.
The cruising industry is in shambles right now, yes. But, the fact of the matter is that consumers are ready to leave their houses. People are getting stir-crazy, and are booking cruises for 2021 at the fastest rate we have seen in over a decade, and all with little to no marketing. The partnerships that Royal Caribbean has trumps all of its competitors, and its financials place it in a great spot as well. As soon as cruising on a wide-scale begins again, Royal Caribbean will only go up from there.
Disclosure: I am/we are long RCL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.