Cruise Lines Pare Back Spending, Tap Excess Liquidity

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.

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