1 More Reason To Avoid Cruise Ships
Last month I showed you 4 Reasons To Avoid Norwegian Cruise Lines.
Here’s a brief recap of what I said then about avoiding the stock before we get to today’s article…
If you want to read the full article on Norwegian Cruise Lines use the link above.
- It’s The Most Indebted Cruise Line
As a percentage of its balance sheet, Norwegian is the most indebted of the major 3 cruise ship lines.
As of the most recent quarter its balance sheet is made up of 73.4% of total liabilities. And its debt to equity ratio is 1.93.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. And, to help insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
Norwegian has the opposite problem – in too much debt on an individual basis. But also when compared to its competitors.
Carnival’s (CCL) balance sheet is 48.3% total liabilities and its debt to equity ratio is 0.45.
And Royal Caribbean’s (RCL) balance sheet is 69.4% total liabilities and it has a debt to equity ratio of 1.26.
Norwegian is the most indebted company of the 3 major cruise line operator stocks. And this makes it enormously risky.
But there’s another reason to stay away from its stock.
2. It’s the Most Unprofitable Cruise Line
In the most recent quarterly data Norwegian was unprofitable on a net income and a free cash flow basis.
These both due to increased costs related to the coronavirus. And an almost complete stoppage in their business since then.
Its Net income profitability margin in the trailing twelve months (TTM) period was negative 29.6%. And its free cash flow to sales (FCF/Sales) margin in this same time was negative 12.5%.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
Generally, you want these numbers to be as high as possible on the positive side because that means the company is generating more profits and cash flow from its operations.
But these were negative in the last quarter to a large degree. Which means it lost a ton of money and is unprofitable over the last 12 months.
As a comparison Carnival’s net income profitability margin in the TTM period is – 4.6%. And its FCF/Sales margin was – 12.5%
And Royal Caribbean’s net income profitability margin in the TTM period is -12.8%. And its FCF/Sales margin was – 9.2%.
These show the industry getting hammered in the last 12 months. But that Norwegian was hit even worse than the others in its industry.
And there are still two more reason to avoid Norwegian’s stock in the coming months.
3. It’s the Third Largest Operator In Its Industry
Most of the time, you want to invest in the biggest and best company with the largest competitive advantages in its industry.
Royal Caribbean doesn’t have these either.
Its only 28% of the size of the largest cruise line operator in the industry Carnival.
And 36% of the size of the number two in the industry Royal Caribbean.
Meaning it’s at a competitive disadvantage to these two far larger competitors in terms of size.
This means Norwegians costs are higher and this makes its margins lower which you saw above.
Over the long term this is a huge deal by itself.
But it’s especially important in times of crisis like we’re dealing with now.
These three things are important. But there’s still one more reason that trumps all others when considering an investment in this industry.
4. Uncertainty Related To The Coronavirus
This all circles back to the beginning and the entire hospitality industry getting hammered by the coronavirus.
Air travel, hotels, and restaurants are still getting hammered. But at least are opening to some degree worldwide.
As of this writing cruise ships still aren’t operating.
And won’t operate until August at the absolute earliest.
But with coronavirus cases spiking nationwide, and in Florida especially where many of these cruise lines operate out of, can cruise lines begin operating in August? Or will the date to reopen for the ships be pushed back farther?
Frankly, I don’t think it matters much…
I don’t see how cruise lines can operate at anything close to full capacity whenever they begin operating.
Both due to fewer people wanting to get on the ships when their operations open. And due to whatever limitations the government puts on them to begin operating again.
Will they open at 75% capacity? 50% capacity? Something else?
As of this writing its not certain. But anything below full capacity will mean even lower revenues, profits, and cash flows for this entire industry.
And with Norwegian already having the highest debt load, smallest competitive position, and lowest margins this will negatively affect them more than its larger competitors.
I recommend you stay far away from this entire industry for the time being for the reasons above. But especially stay away from Norwegian.
Since then, things have only gotten worse for cruise lines…
Some cruise lines began sailing again for the first time since March 2020, in July and August after this article was originally published… Only to be forced to shut back down almost immediately due to coronavirus infections for passengers on board their ships.
That led The Cruise Lines International Association to announce on August 5th, 2020 that its members – “which include nearly every line with ships sailing out of American ports” willbe suspended from sailing until at least November 1st, 2020.
All of them.
This means that at the absolute earliest major cruise lines sailing out of the US will now be shut down for a full 8 months from March 2020 to November 2020.
Some cruise lines are even canceling trips all the way into March of 2021 already.
Companies aren’t built to generate $0 revenue for a few days, weeks, or months. Let alone a full year.
Back in June 2020 after Carnival released its quarterly report, analysts estimated that it was losing $20 million per day that its operations were closed.
This is a major reason it showed a $4.4 billion loss in that quarter.
Industry wide closures for 8 to 12 months will lead to bankruptcies and/or massive financial restructurings for cruise ships companies worldwide.
Back in July I ended the article by saying that while you needed to stay away from Norwegian Cruise Lines stock for various reasons… That you should stay away from this entire industry due to the massive uncertainties with the coronavirus.
And you still should… Because as of this writing there’s no end in sight to the struggles of these companies.
Stay away from Norwegian and all cruise ships stocks right now to preserve your capital.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.