Cruise Line shares ride a wave. Here’s how they can sink.

Unlike the U.S. airline industry, cruise line companies were pretty much alone and received no financial aid from the federal stimulus bills. Why? While the companies operate outside of Florida, they are based abroad in tax havens and pay no substantial U.S. income tax.

The debt and share sales left the three companies with enough cash to dispel the downturn, but it cost a price. Due to higher interest costs and a sharp increase in outstanding shares, this will reduce investors’ returns.

For example, Carnival’s net debt is expected to rise to about $ 23 billion by the end of its current financial year, compared to $ 11 billion at the end of 2019. The company’s projected interest expense of $ 1.7 billion this year is higher than $ 200 million in 2019, and the outstanding shares are up to 1.1 billion compared to about 700 million.

Dividends and share buybacks are likely to be off the table for several years as companies focus on debt reduction. For industry leader Carnival, which has raised $ 23.6 billion since March 2020, it calls for caution in its inventory.

The bullshit is that the cruise lines will benefit from a huge pent-up demand as more people are vaccinated and the economy opens up. Investors were prepared to pull up the losses – Carnival reported a $ 2 billion loss for the first quarter last week – and are looking forward to a full return on travel.

The shares of Carnival, Norwegian and Royal Caribbean have recently risen along with other travel-related shares.

“This is definitely a reopening and momentum trading,” said Patrick Scholes, an analyst at Truist Securities. “The market is booming again early next year, which is questionable, and that 2023 will not only be a normal year, but also a better year than 2019, but also questionable.”

He has a sell rating on Carnival’s shares and Hold ratings on Norwegian and Royal Caribbean.

Carnival, at about $ 29, trades 1,723 projected 2023 earnings per share of $ 1.67; Norwegian, at $ 31, made 13 times an estimated 2023 earnings of $ 2.30 per share; and Royal Caribbean, at $ 90, traded 1523 projected 2023 earnings of $ 5.99 per share.

These are optimistic revenue estimates that will assume higher operating profit in 2023 than in 2019. Jamie Rollo, analyst at Morgan Stanley, which has forecasts for 2023 in operating income under consensus, wrote on Friday: ‘We doubt whether the industry will be bigger or more profitable than before -Covid. ”

There may not be meaningful free cash flow until 2023 or 2024 due to interest costs and still high capital expenditure, as the industry wants to refresh a fleet that has an average age of more than ten years.

Admittedly, there are signs that holidaymakers are eager to travel again and return to the sea.

Carnival highlighted this trend in a first-quarter update last week. Booking volumes accelerated in the first quarter and were approximately 90% higher than in the fourth quarter. This reflects a significant boost to demand, ‘Carnival said. It added that pre-bookings for 2022 are a ‘very strong’ 2019.

In a telephone conversation, Carnival CEO Arnold Donald said the company has enough liquidity to sustain until next year without any revenue. The financial priorities, once the journeys begin, include recovering an investment grade rating and reducing interest expense.

Royal Caribbean chief financial officer Jason Liberty said earlier this year that the company expects the resumption of operations to lead to ‘compelling returns and a strong balance sheet’.

Norwegian Cruise Line chief financial officer Mark Kempa said in the company’s fourth quarter that he ‘remains focused on our long-term strategic priorities and creates a clear path to financial recovery’.

Investors have in part moved to cruise lines, Truist’s Scholes says, because they are one of the few groups of stocks in the travel industry that are still significantly below prepandemic levels.

Carnival, for example, is 40% below $ 50 at the end of 2019.

Yet the three cruise line operators predicted year-end business values ​​(equity value plus net debt) that were higher than where they stood at the end of 2019 due to higher debt and more outstanding equities.

To the frustration of the industry, the U.S. Centers for Disease Control and Prevention has not set a fixed date for the resumption of voyages from U.S. ports, although the agency said in an email last week to Barron’s that it wants a “resumption of passenger operations in the U.S., voiced by many major cruise ship operators and travelers, hopefully by midsummer.”

Norwegian Cruise Line recently offered to sail ships with fully vaccinated passengers and crew to break the logjam and resume US voyages in July.

Norwegian CEO Frank Del Rio told CNBC that “it’s time to sail back” and that fully vaccinated ships will be one of the safest places.

Scholes says fully vaccinated vessels may not be a long-term solution for the industry, as a significant percentage of Americans promise not to be vaccinated.

Asked about fully vaccinated ships, Carnival’s Donald said last week that the company “will have to see how it develops.”

“The most important thing is to reduce risks,” he said. “We can not – preferably not be and hopefully not – be asked to maintain a zero-risk standard, because honestly there is no consideration anywhere else in society. We just like to be treated similarly to the rest of the travel and entertainment and tourism sector. And if we do, it will go well with us. ‘

Although the discussions are strong, it is unclear whether travelers – and especially older people, an important demographic – will be as eager to sail as before the pandemic.

Investors apparently do not reflect the risks or the earnings dilution of the financing flood in their enthusiasm for the cruise line shares.

Write to Andrew Bary by [email protected]