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Ships tend to make better speed by jettisoning ballast, not adding to it. But some of the best-performing stocks of 2023 have been large cruise lines, now freighted with debt from pandemic shutdowns.
The likes of Carnival, Royal Caribbean and Norwegian were at risk of running aground in 2020. A lacklustre recovery followed in 2021 and 2022. Holidaymakers appeared reluctant to maroon themselves on floating islands where new and old pathogens can jostle for pre-eminence.
Yet the buffets, campy entertainment and shuffleboard have proved as irresistible as a siren’s song. The shares of the trio of big cruise operators have each about doubled so far in 2023.
Carnival announced record revenue in its most recent quarter. Customer deposits of $7bn were at an all-time high.
Cruise companies feature operating leverage. Ships have heavy fixed costs so each incremental passenger is highly valuable. Hefty financial leverage means slight improvements in operating performance create further bounce.
Still, investors should worry about cruise lines running out of steam.
Even after a huge rally, the stock prices of cruise companies are well below pre-pandemic levels. Much of that difference can be explained in the components of value. At the end of 2019, Carnival had a market value of equity of about $35bn. Today, that is now $24bn as the company has issued dilutive stock. More notably, its net debt balance has exploded from $10bn to $30bn.
Carnival’s enterprise value today of more than $50bn exceeds the figure from the end of 2019 by about a tenth. This is even as it projects about $4bn of 2023 ebitda, a fifth below the figure it reported in 2019.
Operating costs excluding fuel, notably labour, are rising by more than a tenth annually. Carnival’s enterprise value-to-ebitda multiple of more than 12 times is substantially higher than it was pre-pandemic.
Wall Street has moved from worrying about bankruptcy filings to showering cruise ships with ticker tape from the quayside. But given debt levels, these businesses continue to sail through dangerous waters.
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