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When it comes to ships, shedding ballast leads to better speed rather than adding more weight. However, some of the top-performing stocks in 2023 happen to be large cruise lines, burdened by the debt incurred from pandemic shutdowns.
In 2020, Carnival, Royal Caribbean, and Norwegian faced the risk of financial ruin. A lackluster recovery followed in 2021 and 2022, as holidaymakers were hesitant to vacation on floating islands where new and old pathogens could coexist.
Nevertheless, the allure of buffets, campy entertainment, and shuffleboard has proven to be irresistible. The stocks of these three major cruise operators have each doubled in value so far in 2023.
Carnival recently announced record-breaking revenue in its latest quarter, with customer deposits reaching an all-time high of $7 billion.
Cruise companies operate with significant leverage. Since ships have high fixed costs, each additional passenger holds significant value. The financial leverage also means that even slight improvements in operating performance can lead to further financial gains.
However, investors should be cautious about the potential for cruise lines to lose momentum.
Despite the substantial rally, cruise companies’ stock prices remain below pre-pandemic levels. This discrepancy is primarily due to changes in the components of value. For example, at the end of 2019, Carnival had an equity market value of approximately $35 billion. As of now, that value has decreased to $24 billion due to dilutive stock issuance. Additionally, its net debt balance has skyrocketed from $10 billion to $30 billion.
Even though Carnival’s enterprise value exceeds the 2019 figure by about a tenth, reaching over $50 billion, the projected 2023 ebitda is approximately a fifth lower than the reported 2019 figure, standing at around $4 billion.
Operating costs, excluding fuel and notably labor, have been rising by more than 10% annually. The current enterprise value-to-ebitda multiple for Carnival is substantially higher than pre-pandemic levels, at more than 12 times.
Wall Street has shifted from fearing bankruptcy filings to celebrating cruise ships’ success at the quayside. However, given the debt levels, these businesses continue to navigate treacherous waters.
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