Stocks of cruise lines are riding a wave. Here’s how they could sink.

Unlike the U.S. airline industry, cruise line companies were virtually alone and received no financial assistance from federal stimulus bills. Because? Although the companies operate outside of Florida, they have their domicile abroad in tax havens and do not pay U.S. income taxes.

Debt and equity sales have left all three companies with enough money to overcome the recession, but they have come at a price. They will be reduced in investor returns due to higher interest expenses and a sharp increase in outstanding shares.

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

Dividends and share repurchases are likely to be off the table for several years as companies focus on debt reduction. For the Carnival industry leader, who has raised $ 23.6 billion since March 2020, caution must be exercised over his actions.

The thing is, cruise lines will benefit from huge accumulated demand as more people are vaccinated and the economy opens up. Investors have been willing to set aside losses – last week Carnival posted a loss of $ 2 billion in the first quarter – and expect a full return on travel.

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

“There’s definitely a reopening and boost to trading here,” says Patrick Scholes, an analyst at Truist Securities. “The market is returning to shipping early next year, which is questionable, and that 2023 will not only be a normal year, but will be better than 2019, which is also questionable.”

It has a sell rating on Carnival and Hold shares in Norway and Royal Caribbean.

Carnival, with about $ 29, is trading 17 times and projected a 2023 profit per share for $ 1.67; Norway, at $ 31, makes 13 times an estimated 2023 earnings of $ 2.30 per share; and Royal Caribbean, at $ 90, is trading 15 times and projected profits for 2023 of $ 5.99 per share.

These are optimistic earnings estimates that represent higher operating profits in 2023 than in 2019. Morgan Stanley analyst Jamie Rollo, who has industry earnings projections below the consensus for 2023, wrote Friday that “we doubt whether the industry is larger or more profitable than it was precovida “.

There may be no significant free cash flows until 2023 or 2024 due to still high interest and capital expenditures as the industry seeks to upgrade a fleet that has an average age above ten. years.

There are indications, of course, that tourists want to resume the journey and return to the seas.

Carnival highlighted this trend in an update from the first quarter of last week. Reserve 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 advance bookings for 2022 are ahead of a “very strong” 2019.

In a conference call, Carnival CEO Arnold Donald said the company had enough liquidity to last well into next year with no revenue. Their financial priorities, once travel has begun, include regaining an investment grade bond rating and reducing interest expenses.

Royal Caribbean chief financial officer Jason Liberty said earlier this year that the company hoped the resumption of travel would lead to “convincing returns and a strong balance sheet”.

Norwegian Cruise Line chief financial officer Mark Kempa said in the company’s fourth-quarter earnings release that it remained “focused on our long-term strategic priorities and creating a clear path to financial recovery.”

Investors have gravitated toward cruise lines, in part, says Truist’s Scholes, because they are among the few stock groups in the travel industry that are still significantly below pre-pandemic levels.

Carnival, for example, is 40% below a price tag of $ 50 by the end of 2019.

However, the three cruise line operators have projected year-end business values ​​(equity value plus net debt) higher than their position at the end of 2019 as a result of higher indebtedness and more outstanding actions. .

To the frustration of the industry, U.S. Centers for Disease Control and Prevention has not set a firm date for the resumption of travel from U.S. ports, though the agency said last week in an email to De Barron who wished a “resumption of passenger operations in the United States, expressed by many important cruise operators and travelers, hopefully in the middle of summer.”

Norwegian Cruise Line has recently offered to sail with fully vaccinated crew and crew members to break the logjam and restart voyages to the United States in July.

Norwegian CEO Frank Del Rio told CNBC that “it’s time to get back on the cruise” and that fully vaccinated boats will be one of the safest places anywhere.

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

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

“The most important thing is to mitigate the risk,” he said. “We can’t be asked – prefer not to be and hopefully not – to face a zero risk standard because, frankly, nowhere else in society is this being considered. We like to be treated similarly to other travel, entertainment and tourism. And so, if we do, we will be fine.

While bookings are strong, it is unclear whether travelers, and especially the older ones, a major demographic, will be as eager to take cruises as they were before the pandemic.

Investors do not appear to reflect these risks or the dilution of the benefits of the flood of funding in their enthusiasm for the actions of cruise lines.

Write to Andrew Bary to [email protected]