March 16, 2020 BARRON’S 29
have come to face an unprecedented
crisis—bears would say existential—as
cancellations mount, bookings plum-
met, and the U.S. government discour-
ages older people—a core client
group—from cruising.
The rapidly deteriorating situation
in an industry strapped with fixed
costs poses a major test of the finan-
cial strength of the cruise companies
and could lead to a cash crunch and,
by extension, dividend cuts for the
two cruise lines that pay them—Royal
Caribbean andCarnival(CCL).
“It’s dire in the near term,” says
Harry Curtis, an Instinet analyst who
has covered the cruise industry for
many years. “Whether it’s dire in the
intermediate term depends on the
duration of the coronavirus.”
If the virus is controlled here by the
late spring or early summer, he says,
“the issue at least becomes more man-
ageable” for the cruise lines.
Adding to the fraught and fast-
changing story was Carnival’s an-
nouncement Thursday that it had vol-
untarily suspended its 18-ship
Princess Cruises fleet through May
- That was followed Friday by
monthlong suspensions for Royal Ca-
ribbean’s U.S. cruises andNorwegian
Cruise Line Holdings’ (NCLH).
This, of course, will further pres-
sure earnings. And earnings estimates
for the big three U.S. operators—Car-
nival, Royal Caribbean Cruises, and
Norwegian Cruise Line—already have
eroded considerably.
Analysts polled by FactSet expect
Carnival to earn $3.22 a share for its
fiscal year ending inNovember, down
from a $5.11 estimate a year ago. Esti-
mates have slid to $7.32 from $11.18 for
2020 for Royal Caribbean, and to
$3.66 from $5.94 for Norwegian.
These estimates will likely fall fur-
ther; the question is by how much.
That uncertainty is a major reason
why the stocks have sold off by 70%
or more since Jan. 20, when the first
reported coronavirus cases outside of
China occurred. However long it takes
to navigate through the immediate
crisis, it’s probable that the stocks will
be depressed for a long time, and that
the cruise line’s liquidity, or available
cash, will be tested.
These aren’t exactly comforting
thoughts for investors, but as of
Thursday, these companies appeared
to have the financial wherewithal to
ride out at least a few horrible quar-
ters. Indeed, Royal Caribbean said
this past week that it had increased
its revolving credit capacity by $550
million.
Deutsche Bank Securities analysts,
in a March 10 research note, observed
that the cruise lines have ample li-
quidity, though leverage ratios could
spike. The higher these ratios go, the
less cash flow a company has to cover
its debt service.
The Deutsche Bank analysts ran
scenarios in which the cruise opera-
tors generate various levels of earn-
ings before interest, taxes, deprecia-
tion, and amortization, or Ebitda, a
proxy for operating cash flow.
For example, if Royal Caribbean
throws off the same amount of Ebitda
this year as it did in 2019, its net-debt-
to-Ebitda ratio would be a manage-
able, if not pristine, 3.5—up from 2.9
last year. That includes the expense of
paying dividends.
However, if the company’s Ebitda
drops by 20%, the ratio would go to
4.6 times. If Ebitda fell by 50%, the
leverage ratio would go to 8, and the
cruise line likely would have trouble
servicing its debt.
Norwegian, which doesn’t pay a
dividend, would see its leverage ratio
climb to 4.3 times if its Ebitda
dropped 20%. That would compare
with 3.4 times in 2019, according to
Deutsche Bank. Norwegian didn’t
respond to requests for comment.
At the end of 2019, Carnival, the
largest cruise operator as measured
by sales, sported the lowest leverage
ratio at 2. A 20% decline in Ebitda
would push that to 3—not good, but
not horrendous.
Still, there are questions about
whether Carnival can sustain its divi-
dend, even though it had the strongest
balance sheet of the three cruise com-
panies heading into 2020.
Jamie Rollo of Morgan Stanley fig-
ures that Carnival will have $7 billion
in capital expenditures this year, of
which $4.8 billion would be for new
ships, and $1.8 billion would go for
debt repayment. Owing partly to its
cash on hand and an undrawn credit
facility of $2.8 billion, it would have
nearly $7 billion of liquidity, essen-
tially cash.
“The company would generate suf-
ficient cash flow” if this year’s revenue
doesn’t fall by any more than 21%,
observes Rollo. However, he adds an
important caveat: “This also assumes
that the $1.4 billion dividend is sus-
pended, which seems likely to us.”
Carnival, which declined to com-
ment on its dividend, faces other
headwinds. It’s the only major cruise
line that has had a ship—in its case,
two—quarantined due to the coronavi-
rus outbreak. And it has the biggest
exposure to continental Europe and
the spreading coronavirus threat
there, according to UBS analyst Robin
Farley.
Still, that dividend cuts are on the
table illustrates the major problems
these companies face. But they should
eventually bounce back—just not
soon. “Think about how bad it was in
2009,” Curtis points out, referring to
the industry during the financial cri-
sis. “Did they go away in 2009? No.”
But investors did, and for quite a
while.B
BattentheHatches,
CruiseLineInvestors
Carnival, Royal Caribbean, and Norwegian are heading for rocky shoals,
but they should have the financial means to endure a few bad quarters
“It’s dire in the
near term.
Whether it’s
dire in the
intermediate
term
depends on
the duration
of the
coronavirus.”
Harry Curtis,
industry analystD
uringRoyal Caribbean
Cruises’ fourth-quarter
earnings call in early Feb-
ruary, with the new coro-
navirus still in its infancy
in the U.S., CEO Richard
Fain said that “no one
knows how this outbreak will play
out, and we don’t know how it will
ultimately impact us.”
Cancellations of sailings in China
and modified itineraries, he said,
would cost the company 25 cents a
share.
That toll looks like a pittance today.
In the six weeks since that call, as
the virus has spread worldwide, Royal
Caribbean (ticker: RCL) and its peers
By LAWRENCE C. STRAUSS
Quarantined ships and skittish travelers are stoking uncertainty for cruise-line operators. Here, a Florida man
disembarks from the Caribbean Princess this past week after U.S. health officials lifted a “no sail” order.Joe Cavaretta/South Florida Sun-Sentinel/AP
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