Stocks of cruise lines go on a wave. Here’s how it might sink.

Unlike the US airline industry, cruise line companies were pretty much self-employed and did not receive any financial assistance from federal incentive bills. Why? While companies operate outside of Florida, they are domiciled offshore in tax havens and do not pay material taxes on US income.

Sales of debt and equity left the three companies with enough cash to deal with the recession, but came at a price. These will reduce the return on investors due to higher interest costs and a sharp increase in outstanding shares.

Carnival’s net debt, for example, is expected to grow to about $ 23 billion by the end of the current fiscal year in November, up from $ 11 billion at the end of 2019. The company’s expected interest expense in this year $ 1.7 billion a year are up from $ 200 million in 2019, and its outstanding shares are up to $ 1.1 billion from about $ 700 million.

Dividends and share repurchases are likely to be removed from 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 over its stock.

The case of the bull is that the cruise lines will benefit from a huge demand, as more people will be vaccinated and the economy will open. Investors have been willing to forgo losses – last week Carnival reported a $ 2 billion loss in the first quarter – and expect a full return to travel in the future.

Shares of Carnival, Norwegian and Royal Caribbean have recently rallied, along with other travel-related stocks.

“This is definitely a reopening and a commercial boost,” said Patrick Scholes, an analyst at Truist Securities. “The market is ripening into a full return to navigation by early next year, which is doubtful and that 2023 will not only be a normal year, but a better one than 2019, which is also questionable.”

It has a sale rating on Carnival shares and has a rating on Norwegian and Royal Caribbean.

Carnival, at about $ 29, trades projected earnings per share of $ 1.67 1723; The Norwegian, with $ 31, gets 13 times the estimated earnings for 2023 of $ 2.30 per share; and Royal Caribbean, worth $ 90, trades 15 times and has estimated 2023 profits of $ 5.99 per share.

These are optimistic estimates of earnings that imply higher operating profits in 2023 than in 2019. Morgan Stanley analyst Jamie Rollo, who has consensus industry earnings forecasts for 2023, wrote Friday that “we doubt the industry will be bigger or more profitable than it was pre-Covid. ”

There may not be a significant free cash flow until 2023 or 2024 due to still high interest and capital expenditures as the industry tries to refresh a fleet that has an average age of over 10 years.

There are certainly signs that tourists are eager to resume their journey and return to the seas.

Carnival highlighted this trend in a first-quarter update in the last week. Book volumes accelerated in the first quarter and were about 90 percent higher than in the fourth quarter, reflecting “significant accumulated demand,” Carnival said. He added that early bookings for 2022 take place before a “very strong” 2019.

In a conference call, Carnival CEO Arnold Donald said the company had enough liquidity to last until next year with no revenue. Its financial priorities, once travel begins, include regaining a rating of investment-quality bonds and reducing interest expenses.

Royal Caribbean CFO Jason Liberty said earlier this year that the company expected the resumption of travel to lead to “convincing returns and a strong balance sheet”.

Norwegian cruise line chief financial officer Mark Kempa said in his company’s fourth-quarter earnings statement that he remained “focused on our long-term strategic priorities and creating a clear path to financial recovery.”

Investors have drawn attention to cruise lines, in part, says Truist’s Scholes, as they are among the few stock groups in the tourism industry that are still significantly below pre-pandemic levels.

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

However, the three cruise line operators forecast the company’s values ​​at the end of the year (value of equity plus net debt) which are above the level they were at the end of 2019 as a result of higher debt and more shares. remaining.

To the frustration of the industry, the U.S. Centers for Disease Control and Prevention has not set a firm date for resumption of voyages from U.S. ports, although the agency said last week in an email to Barron’s that he wanted a “resumption of passenger operations in the US, expressed by many large cruise ship and passenger operators, hopefully in the middle of summer.”

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

Norwegian CEO Frank Del Rio told CNBC that “it’s time to return to the cruise” and that fully vaccinated ships will be among the safest places anywhere.

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

Asked about the fully vaccinated ships, Donald Carnival said last week that the company “will have to see how this evolves.”

“The key is risk mitigation,” he said. “We cannot be – we prefer not to be and we hope we will not be – asked to rise to a zero risk standard because, honestly, nowhere else in society is this considered. We like to be treated similarly to the rest of the tourism and entertainment sector. And if we do that, we will be fine. “

While bookings are strong, it is unclear whether travelers – and especially the elderly, an important demographic – will be as eager to go on a cruise as they were before the pandemic.

Investors do not appear to reflect these risks or the dilution of earnings from the flood of financing in their enthusiasm for cruise line stocks.

Write to Andrew Bary at [email protected]