November 27, 2022

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After a long and painful pandemic for the cruise industry, the recovery for Royal Caribbean (RCL -12.88%) continues. More than a year has passed since the COVID-19 pandemic kept it docked for 16 months.
And amid this comeback, revenue continues to grow as more passengers return to the seas. Additionally, its stock bounced back significantly from the June lows and maintained some of its gains even as the market turned negative. Still, the question for investors is whether this means they should buy the cruise line stock or stay on the sidelines.
In the post-pandemic cruise industry, Royal Caribbean maintains a hold in the cruise ship market. At the end of 2021, 24% of all cruise passengers sailed on a Royal Caribbean ship. This was second only to Carnival Cruise Lines, which claimed 42% of the passenger volume.
Moreover, the financials point to a rapid improvement. Royal Caribbean brought in $3.2 billion in revenue in the first half of the year, up from $92 million in the same period last year amid the pandemic. It also reduced its losses, losing $1.7 billion in the first two quarters of 2022 versus $2.5 billion in the first half of 2021.
Furthermore, load factors, a measure of ship-occupancy levels, continue to rise. These came in at 82% for Q2 and rose as high as 90% in June. Royal Caribbean predicts that load factors will exceed 100% by Q4, meaning that three or more people occupy some of the rooms.
Nonetheless, the company is far from a full recovery. While the numbers for the first half of 2022 are cause for optimism, investors should note that the company reported revenue of $5.2 billion in the first two quarters of 2019. This means revenue is still down 38% from 2019 levels.
However, revenue should recover by next year. Analysts project $12.6 billion in revenue in 2023, well ahead of the $11.0 billion in revenue for 2019. That should also return Royal Caribbean to profitability.
Unfortunately for the cruise line, a balance sheet recovery will probably take significantly longer. Due to shutdowns, Royal Caribbean brought in little revenue during the pandemic while its fleet imposed high fixed costs on the company. Since its 255 million share count has increased by only about 23% since the end of 2019, Royal Caribbean has turned primarily to debt to stay afloat, a factor putting significant strain on the balance sheet.
Total debt stood at $11 billion at the end of 2019. By the second quarter of 2022, that debt had more than doubled to $23.6 billion. In comparison, stockholders’ equity is only $3.4 billion. This means that even if Royal Caribbean turns profitable, it will have to use profits to pay down debt rather than reinvest into the company. And since it still loses money, it may have to increase its debt further or issue more shares.
In fairness, Royal Caribbean holds up relatively well compared to Carnival, especially considering Carnival’s higher debt levels. Still, such financial strains make it less likely investors will take an interest in the stock.
Royal Caribbean’s likely return to profitability next year probably means it will survive and remain a force in its industry. Unfortunately for investors, the massive debt burden makes it less likely that its stock will enjoy sustainable, significant gains in the near future.
Under current conditions, debt service will probably consume most of its profits. Moreover, issuing additional shares to pay down debt will dilute shareholders. While this will not sink Royal Caribbean, the stock may do little more than stay afloat for some time to come.

Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.
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