People are saying that no one will ever take a cruise again. It’s over. Done. Pack those cruise ships up and send them home… But do people actually not remember the PR disaster Carnival dealt with in 2013? Here’s a great headline from that time: “Stranded cruise ship on which ‘sewage ran down the walls’ and ‘savages’ fought over food finally docks amid jubilant scenes“. This came not too long after Costa Concordia wrecked and the Captain jumped ship (literally). 32 people died. I bet you can imagine what happened to Carnival’s sales in 2013 then?
Oh, that’s right – they were up. In 2014 they were up… they’ve basically been on an uninterrupted pace for a long time. In fact, many of these cruise lines have been public for so long that you can see how they performed after SARS, 9/11, 2008, Zika, Ebola – they pretty much kept on humming. Apparently nothing will stop college kids and boomers from taking a cruise.
I’m not saying you should buy them today, but they’ve historically traded at 10-13x EBITDA and are now trading at 5x. The market is currently pricing in death. I can confidently say that because they now are trading below the book value of cruise ships as well.
Now, cruise companies do have ship deliveries, which is something to monitor. This could crimp liquidity as they also take a demand hit in the next year. But they also likely have tools to pushback on shipbuilders during times of stress. These are the shipbuilders main customers, so not like they want their customers to go into bankruptcy either.
However, some names like Roayl Carribean are investment grade and “December 31, 2019, we had liquidity of $1.5 billion, consisting of $243.7 million in cash and cash equivalents and $1.3 billion available under our unsecured credit facilities, net of our outstanding commercial paper notes”. Norwegian just announced at $675MM revolver with JPM priced at L+80bps.
I think the liquidity situation is fine to support a year of weakness, though admittedly, I’m not sure they could survive a whole year of lost revenue. Plus, the ships must be very expensive to dock and that is an ongoing fixed cost….
Lets just try to understand if this virus or 1 year impact should have that much of an impact on cruises (people will fight me on this, but I don’t think cruises are dead… people will still take cruises) but this is relevant for all businesses right now.
Here is a company that is expected to earn $10 in EPS in year 1 and grow ~2% a year. I discount these earnings, and the terminal value, back at 10% to arrive at ~$120 in value, which foots to a 12x P/E. P/E is just short hand for a DCF and that is what I am trying to show here so you can think about if a multiple compression actually makes sense.
*Note: terminal value is the value of a the future cash flows of a business beyond the forecast period, assuming a constant growth rate, in this case 2%.
Now lets say year 1 earnings are toast – they get cut in half. But year 2+ are the same because demand comes back. As you can see below, this had a ~4% impact on the intrinsic value of the business… not 50%! People may say, “well investors only look at earnings over the next year or two, so applying a 12x multiple to $5 in EPS is why the stock gets crushed.” Thanks – I realize that, but the math says that is wrong and an opportunity to make money.
Buying cruise lines is risky right now and up to you. Sorry for the headline, but hopefully you use this as a tool to find other companies who have not had their intrinsic value meaningfully impacted.