Royal Caribbean The global cruise company (NYSE: It owns global brands such as Royal Caribbean International, Celebrity Cruises and Azamara, along with Silversea Cruises. 

RCL stock has my attention. (See Royal Caribbean stock charts on TipRanks)

The Perfect Storm

COVID-19 was a perfect storm for the cruise sector for many reasons.

When the pandemic started, many cruise liners became stuck on the waters when their ports refused entry. At one point, there were many thousands of seafarers on foreign shores.

All of the industry’s operations were shut down by the end of the night in spring 2020.

A cruise ship is not like other attractions or entertainment. It’s almost impossible for people to get along on a cruise ship. Restaurants can only open to 50% of their capacity on cruise ships.

The worst part for shareholders is that major cruise lines like Royal Caribbean aren’t based in the United States. This was done to maximize tax havens.

Although this strategy may have looked good at the time, it did not allow the industry to receive the same bailout money of billions that was given to the airline industry. The industry did everything on its own.

The Company takes on water

In fiscal 2020 revenues plummeted by an astonishing 80%. They fell to only $2.2Billion from $10.9Billion in 2019, and a shocking 80% drop in revenue. In the twelve months following the report’s June 30, 20,21, it was $93.4 million. Each quarter, the operating losses reached the billions since the shutdown.

Royal Caribbean had no other options and decided to issue shares to keep the company afloat. It also took on long-term debt of billions. Before shareholders see any reasonable return on their investments in dividends and share buybacks, they will have to pay this.

The long-term interest rate has gone up 90% in the past 12 months. An already high $8.2 billion debt is now worth well more than $20 billion. Royal Caribbean did not make $2 billion even though it was running at maximum speed in 2019. To get rid of this debt will take years.

Value isn’t attractive

You would expect that stock prices would drop if there were so many negative factors. Perhaps investors can bet on a turnaround story, and get handsomely rewarded.

But this isn’t the case. The market cap of RCL stock is just 16% less than the December 2019 price, even though it’s 31% higher now than the December 2019.

What is the explanation? This is because the company was able to issue many shares in the pandemic. The diluted share count also grew 21% during this period. Despite the drop in share prices, each share is still a smaller slice of the company’s pie.

Royal Caribbean held $20.7 billion of long-term debt at the end of June 2021, which includes the current amount due and 234 million shares outstanding.

Each share holds $11.54 worth of outstanding debt. Any discount will be negligible if this amount is added to share prices.

The product is damaged, but investors are not getting the clearance price.

Wall Street Take

Wall Street analysts seem to be somewhat positive about RCL stock with three Buys, three Holds and no Sell recommendations. The average RCL price target of $96.25 implies 5.7% upside.

Summary

It was a devastating event for the cruise industry. Royal Caribbean may not fully recover for years, or even decades.

Furthermore, it is important to consider the possible impact on sailing plans that could be affected by another more contagious virus.

This investment is not attractive due to the large amount of debt and high share counts, as well as uncertain futures. Shares that haven’t been discounted sufficiently enough to justify taking on risk are also reasons for concern.

Disclosure: Bradley Guichard didn’t hold any positions in the securities discussed in this article at the time it was published.

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