I continue to follow the plight of the cruise industry with great interest. I hope the industry can revive once the pandemic is in the rearview mirror. I’m not sure we’ve ever had an industry in near-total shutdown mode while this is going on. Yet, despite all the damage, the markets seem to be looking ahead and ignoring how much cruise ship capital structures have changed in the struggle for survival.
Let’s focus on Norwegian cruise lines (NCLH). NCLH has spent significant amounts of debt and equity since the pandemic began. The shares issued have increased from 215 million at the end of 2019 to 315 million today. Debt rose from $ 6.8 billion at the end of 2019 to nearly $ 11 billion at the end of the quarter (September 3). Since then, NCLH has taken on additional debt of $ 850 million. Cash was higher than normal ($ 2.35 billion) at the end of the third quarter, but was a bit of a dry powder to fund cash flow needs.
In my view, all of this before the pandemic and now for an apples to apples comparison is best summed up using Enterprise Value or EV (Market Cap – Cash + Debt). Too often investors focus only on the stock price to judge whether or not it is cheap. However, we need to take a broader perspective and include the entire capital structure and the changes made to it, and EV does that.
NCLH closed 2019 at $ 58.41 and had a market cap of $ 12.6 billion (215 million shares outstanding). Subtracting about $ 250 million in cash and adding $ 6.8 billion in debt results in an EV of $ 19.2 billion. That year, NCLH had sales of $ 6.46 billion and made $ 930 million, or about $ 4.30 per share. Granted, December 2019 may or may not be the best benchmark for NCLH, but hopefully the point is clear nonetheless.
Fast forward to now and NCLH has a current market cap of around $ 7.75 billion based on the current 316 million shares outstanding. I believe that some branches are using an older stock count that doesn’t reflect the most recent stock offering and therefore have a lower market cap. While the share price has fallen 58% since the end of 2019, the market capitalization has only fallen 38% due to the secondary offers. With an estimated $ 11.75 billion in debt, a market cap of $ 7.75 billion, and an estimated $ 3.5 billion in cash ($ 2.35 billion as of 9/30/2020, up 800 Million US dollars in equity in November plus 850 million US dollars in debt in December). After deducting an estimated $ 500 million cash use in the fourth quarter, the current enterprise value is approximately $ 16 billion. That number isn’t far from the $ 19.2 billion EV at year-end 2019 – a similar EV but a drastically different company.
And therein lies the problem for NCLH stock. For example, to go back to an EV of $ 19.2 billion at year-end 2019, all other things being equal, it would imply a share price of about $ 34.50 per share. This would put the current EV and the end of 2019 EV on a par, and given the changes in the capital structure, the price / share is much lower. Not to mention the fact that we really don’t know when the cruise industry will return to normal, how much more money will be burned in the process, and what the even best-case revenue will look like and what effect this will have on shareholder dilution.
From $ 58.41 / share in December 2019 to $ 24.52 on Tuesday isn’t the whole story for NCLH. However, I hope that NCLH and the other cruise lines will soon be able to operate safely and weather this storm.
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