Royal Caribbean (NYSE:RCL) has seen its operations halted indefinitely due to the coronavirus pandemic. It’s shipped are docked and the company has no set date to return to the seas — though it currently aims to return after June 11.
That date remains very much in doubt, and the cruise line has been burning cash to keep its fleet of ships ready for whenever they’re cleared to sail. And, of course, even when the company can begin cruising again, it’s hard to know when customers will be willing to come back.
That means that Royal Caribbean faces a period with almost no revenue coming in followed by one where ships likely sail less than full with customers paying lower-than-normal prices. That has sent shares of the cruise line plummeting to around $34, down from the stock’s 52-week high of $135.32.
Can Royal Caribbean survive?
Royal Caribbean had $1.9 billion in operating profit in 2019. It expected to drive even higher returns in 2020, though it acknowledged in its Feb. 4 fourth-quarter earnings release that it could not yet determine how badly it would be affected by coronavirus.
“Our yield outlook for 2020 is very encouraging with higher pricing on top of an exceptional 2019 performance,” said CFO Jason T. Liberty. “It’s clear that the Coronavirus will impact revenue in China in the short term, but we are a long-term business and our plans to continue growing this profitable market remain unchanged.”
Clearly the company did not fully see exactly how badly coronavirus would disrupt its business. Now Royal Caribbean is taking in almost no money, and it’s likely spending about $600 million per month.
The company has not released any data on its current expenditures, but rival Carnival (NYSE:CCL) has said it is spending $1 billion per month while docked. Carnival has just over 100 ships across its various brands, while Royal has 61.
To make it through the shutdown, Royal Caribbean has taken a number of steps, including drawing down its credit line and adding a new 364-day loan for $2.2 billion. That loan can be extended at the company’s option for a second period of 364 days.
With this loan, Royal Caribbean now has “$3.6 billion of liquidity comprised of cash deposits and its existing undrawn revolving credit facilities,” the company said in a press release. The company also has committed financing for all its new ships on order.
The cruise line did not release the terms of its latest loan, but it’s likely not paying anywhere near the 11.5% interest rate Carnival paid on its recent $4 billion bond offering.
“This is a period of unprecedented disruption for the cruise industry,” said Liberty in a press release about the financing. “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.”
Should you buy Royal Caribbean stock?
The cruise line has the cash to last six or seven more months without any significant revenue. That’s admittedly a bit of a guess, and it’s probably a pessimistic guess, as Royal Caribbean can probably stretch that term by further lowering expenses if the shutdown extends throughout the summer.
It may take until 2022 for life to fully return to normal, and there’s a risk that some passengers will simply not want to cruise. Carnival’s CEO Arnold Donald has noted that despite the current situation, bookings for 2021 have been strong.
That’s encouraging for the entire industry, and while Royal Caribbean has taken on debt, it should be able to manage that, assuming it returns to some semblance of its former profitability by the end of 2021.
This remains a risky investment, but it’s one that offers long-term upside. If you’re willing to accept that market conditions could worsen and force a Chapter 11 bankruptcy in a worst-case scenario, it makes sense to buy a small position in Royal Caribbean.
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