RCL, NCHL, CCL, LIND (CRUISE LINES)

[valueinvestor]

From an earnings perspective - these are incredibly cheap - trading around 2008 levels.

 

The only question is from a liquidation perspective are they cheap? They are trading 0.4-0.7 P/B and if that's the case, I'm sure we would be able to make a meager profit, if it goes to bankruptcy too? Unless, the cruise ships are worth half of their recorded value net of depreciation, then we get zero.

 

However I think the lenders will definitely not want these cruise lines to go bankrupt, as they are the #1, #2, #3 players in the world, hence they will lend and extend the maturities, not that it's needed for RCL or NCHL.

[Haasje]

However I think the lenders will definitely not want these cruise lines to go bankrupt

I don't think this often results in cases where there are great equity gains. I really don't like these. To me it feels like gambling the bailouts will bailout the equity which seems unlikely to me but things can happen  :o :o :o

[Orchard]

The lenders also didn't want these companies to go bankrupt:

PG&E

General Motors

Chrysler

Six Flags

Charter

Lehman Brothers

PHI Inc

iHeartMedia

Arch Coal

Alpha Natural Resources

Walter Energy

Linn Energy

Stelco

Sears

Circuit City

Borders

Visteon Corp

Lyondell Basell

[valueinvestor]

The lenders also didn't want these companies to go bankrupt:

PG&E

General Motors

Chrysler

Six Flags

Charter

Lehman Brothers

PHI Inc

iHeartMedia

Arch Coal

Alpha Natural Resources

Walter Energy

Linn Energy

Stelco

Sears

Circuit City

Borders

Visteon Corp

Lyondell Basell

However I think the lenders will definitely not want these cruise lines to go bankrupt

I don't think this often results in cases where there are great equity gains. I really don't like these. To me it feels like gambling the bailouts will bailout the equity which seems unlikely to me but things can happen  :o :o :o

 

Haha point taken but to be fair just because they don’t want them to go bankrupt, doesn’t mean they won’t.

 

However even if it does go bankrupt - liquidation-wise should bring our downside to near zero.

 

It’s an asymmetric bet, but I don’t know how the bk process works with cruise lines.

[Guest roark33]

You can add LIND to the list of cruise lines.

[Foreign Tuffett]

This is a distressed situation. I try and stay away from large cap distressed situations, as I think individual investors are at informational disadvantages versus hedge funds that can afford to spend heavily to gain access to restructuring experts, beltway insiders, specialized legal expertise, etc. I made this same point in the PCG thread.

[nspo]

These plays should be priced as an option, and therefore sized appropriately. Most people take flights to get to cruise ports.. they don't take cruises to get to flights. So if I were a betting man I'd say that the airlines have a slight advantage in resiliency due to business travelers etc. which will reboot before standard vacationers.

[Kaegi2011]

This is a distressed situation. I try and stay away from large cap distressed situations, as I think individual investors are at informational disadvantages versus hedge funds that can afford to spend heavily to gain access to restructuring experts, beltway insiders, specialized legal expertise, etc. I made this same point in the PCG thread.

 

Agreed.  Think about this - distressed names trade over the counter (really, over the phone).  You can't even reliably get a quote on a credit unless you're in the circle.  Even those quotes (which a lot comes via email), are usually not tradable.  So unless you're incredibly sure that the equity is money good (like Ackman and GGP), I would stay away if your strategy is that the lenders wouldn't let them default. 

 

[longterminvestor]

From a liquidation perspective, US laws for bankruptcy are questionable.  Royal Caribbean is a Liberian Corporation. Carnival is domiciled in Panama. And NCL is domiciled in Bermuda.

[valueinvestor]

I wouldn't bet the farm on this one, but considering it went through the GFC and did not declare bankruptcy, and the maturities are spread out evenly, it is compelling for discussion and further research.

 

My thinking is to keep it as a basket, that way if one or two falls, it can still be lucrative.

 

 

[Kaegi2011]

I wouldn't bet the farm on this one, but considering it went through the GFC and did not declare bankruptcy, and the maturities are spread out evenly, it is compelling for discussion and further research.

 

My thinking is to keep it as a basket, that way if one or two falls, it can still be lucrative.

 

I can see that, but the hard part that I can't really grapple my head around is what's the natural earnings power of these businesses going fwd.  Every time I hear a boat gets sick I wonder when people will stop going on these cruises.  But now... not only can you get sick, you may be stuck floating on the water with no port for weeks!  I'm sure there's probably some price to get people to jump on board, but what is that price?  Who can really know the elasticity of something like this at this stage?  So combined with high opex leverage I'm not sure how to put a fair value here...

[valueinvestor]

I wouldn't bet the farm on this one, but considering it went through the GFC and did not declare bankruptcy, and the maturities are spread out evenly, it is compelling for discussion and further research.

 

My thinking is to keep it as a basket, that way if one or two falls, it can still be lucrative.

 

I can see that, but the hard part that I can't really grapple my head around is what's the natural earnings power of these businesses going fwd.  Every time I hear a boat gets sick I wonder when people will stop going on these cruises.  But now... not only can you get sick, you may be stuck floating on the water with no port for weeks!  I'm sure there's probably some price to get people to jump on board, but what is that price?  Who can really know the elasticity of something like this at this stage?  So combined with high opex leverage I'm not sure how to put a fair value here...

 

As a 1-2% portfolio allocation, I do not think it matters. However for the sake of argument, there are solutions to make the consumer happy.

 

As with airlines and what happened with 9/11, where the possibility of not coming back, as opposed to being stuck in the air was higher in people's minds at the time - however with increased measures, people became comfortable with air travel.

[Xerxes]

https://business.financialpost.com/investing/saudi-arabia-has-bought-8-stake-in-worlds-biggest-cruise-operator-carnival-for-bargain-basement-price

 

Not exactly the world's savviest investors, but still ...

[valueinvestor]

https://business.financialpost.com/investing/saudi-arabia-has-bought-8-stake-in-worlds-biggest-cruise-operator-carnival-for-bargain-basement-price

 

Not exactly the world's savviest investors, but still ...

 

Exactly. Also the investment is small fish compared to this behemoth.

[Kaegi2011]

I do think LIND falls into a different camp.  Looked at this over the past few days. 

 

Super high end tickets (some are $25k+!), national geographics branded excursions, really unique trips that aren't really substitutes for "normal cruises."  Seems more like the baby thrown out with the bathwater situation. 

 

 

[Orchard]

I do think LIND falls into a different camp.  Looked at this over the past few days. 

 

Super high end tickets (some are $25k+!), national geographics branded excursions, really unique trips that aren't really substitutes for "normal cruises."  Seems more like the baby thrown out with the bathwater situation. 

 

 

Baby thrown out with the bathwater?

 

Are you booking one for June?

 

Why does the price matter whether you're going on a cruise / trip / vacation right now or not?

[Kaegi2011]

I do think LIND falls into a different camp.  Looked at this over the past few days. 

 

Super high end tickets (some are $25k+!), national geographics branded excursions, really unique trips that aren't really substitutes for "normal cruises."  Seems more like the baby thrown out with the bathwater situation. 

 

 

Baby thrown out with the bathwater?

 

Are you booking one for June?

 

Why does the price matter whether you're going on a cruise / trip / vacation right now or not?

 

You don't think there's a difference between someone who can pay $25k to go on a trip to Antartica with 20 people vs. thousands paying $1k to be trapped on a ginormous trip?

 

You think people who can afford those passages are impacted sufficiently to stop spending that money, and there's no demand for it going forward? 

 

It's not the price that matters - it's the segment.  But sure, if you think Ferrari is in the same boat as Ford then I guess you wouldn't take a look. 

[Orchard]

I just think that there's a risk that people will be hesitant to travel not because of money but because we don't know if there will be a 2nd wave or not.

[Kaegi2011]

I just think that there's a risk that people will be hesitant to travel not because of money but because we don't know if there will be a 2nd wave or not.

 

Of course there is.  I don't have a clue how much this plays out as much as the next guy.  So yeah, there's risk.

 

But in two years which of the names listed here is more likely to make it back to its original earnings power?  I'm willing to bet on LIND vs. the others. 

[asterisk]

Anyone else confused on the share performance of late for the cruises? CDC has a ~3 month ban on sailing so no revenue :(

 

[5xEBITDA]

I think they are benefiting from 1) increased liquidity positions (CCL issued new 1L bonds and RCL has raised some liquidity) and 2) directionally positive virus news in the US / world. I'm in the camp that these companies have much more downside because, as others have said, I really don't think you get back to "normal" or even "close to normal" cruise bookings any time soon. Another risk that I think has gone unnoticed is the risk of booking cancellations in the form of cash rather than credit. I think it was CCL who said most of the booking refunds they've had to give to-date have been in the form of credit...I think this flips over really hard once 1) people realize cruising will be closed for much longer or 2) there is a 2nd wave of infections (likely in the Fall).

[asterisk]

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwiswZbPt53pAhWMZs0KHWX3ApcQ0PADegQIAxAN&url=https%3A%2F%2Fwww.cnbc.com%2F2020%2F05%2F05%2Fnorwegian-cruise-line-says-theres-substantial-doubt-about-its-ability-to-continue-as-a-going-concern.html&usg=AOvVaw048xHiz1Oa8k7IC3KHOKxw

 

Norwegian looking like it will run out of cash soon. Using back of the envelope math, the company said they had $1.4B of cash as of March 30th and the company is burning $130M a month. Let's add an approximate of $50M of deposit refunds and the company has about 8 months left to live.

 

The industry is in the "too hard" pile for me, but it has been a learning experience to see how important capital structure is in times of stress.

[Lazarus]

Cruise line companies are almost back to March 2020 lows, and CCL has dropped even lower. Makes me very interested in how low they might go and how much potential this sector represents.

 

My thesis is fairly simple:

- the demographics are great for cruises: old people love cruises, so the sector should continue to grow as boomers retire

- there is pent up demand - people who cruise have not been going as much due to Covid

- Covid is (mostly) over - mandates, etc., are mostly over

 

Because of the above, I think the sector should be in position to grow.

 

However, this sector involves discretionary spending so it is very economically sensitive. With a recession predicted, there could be more short-term pain for the sector. But again, I assume that this should be short term.

 

The big dream is that one of the big ones (CCL or Norwegian, etc) file for bankruptcy and the whole sector tanks.

 

Curious to know what people think are the best and worst investments in this sector?  I think that LIND represents the best opportunity - it is small and involves more elite-style cruising, so it might be less sensitive to recession (the rich people who take their cruises are less sensitive to recession).

Edited October 12, 2022 by Lazarus
clarification

[TwoCitiesCapital]

2 hours ago, Lazarus said:

Cruise line companies are almost back to March 2020 lows, and CCL has dropped even lower. Makes me very interested in how low they might go and how much potential this sector represents.

 

My thesis is fairly simple:

- the demographics are great for cruises: old people love cruises, so the sector should continue to grow as boomers retire

- there is pent up demand - people who cruise have not been going as much due to Covid

- Covid is (mostly) over - mandates, etc., are mostly over

 

Because of the above, I think the sector should be in position to grow.

 

However, this sector involves discretionary spending so it is very economically sensitive. With a recession predicted, there could be more short-term pain for the sector. But again, I assume that this should be short term.

 

The big dream is that one of the big ones (CCL or Norwegian, etc) file for bankruptcy and the whole sector tanks.

 

Curious to know what people think are the best and worst investments in this sector?  I think that LIND represents the best opportunity - it is small and involves more elite-style cruising, so it might be less sensitive to recession (the rich people who take their cruises are less sensitive to recession).

 

I dunno. I have been shorting cruise lines and airlines off and on since 2021. 

 

The enterprise values were all well above 2019 levels while profitability was well below and debt loads massively higher, with no obvious end in sight to a y of those inputs. Made no sense to me that they'd be worth more in the capital markets than they'd been in 2019. 

 

I still feel similarly except now all of the stocks are actually down significantly now that the market has turned and everything is hated. 

 

Are they a good opportunity going forward? Hard to say. Global travel still hasn't picked back up yet and you're on the cusp of a global recession which probably delays that. In the mean time, you have fewer ships or ships that are less full which is hard on revenues/margins. 

 

My guess is the bleed continues, the losses continue, and that there will be a better time to buy in the next 6-12 months. 

[Spekulatius]

As @TwoCitiesCapital said, the cruise line stock prices are deceiving because these cruise lines diluted shareholders so much and raised debt. I would rather invest in something like LUV or even BKNG or EXPE if I feel like investing in travel.