Viking Holdings Ltd

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Viking Holdings Ltd is a global cruise company, primarily specializing in river and ocean cruises, with a focus on upscale travel experiences for discerning customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Viking Holdings Ltd (VIK) operates in the global luxury travel market, offering river, ocean, and expedition cruises. The company is based in Bermuda and primarily focuses on North American and European travelers aged 55+.

Viking’s key business segments include:

  1. River Cruises: This is where Viking started, offering intimate, destination-focused travel experiences on European and Asian rivers. The ships are designed to navigate these waterways, providing views of scenic landscapes and historical cities.

  2. Ocean Cruises: Viking expanded into the ocean cruise market, utilizing mid-sized ships that can access smaller and less crowded ports. This is aimed to provide a more intimate cruise experience with curated itineraries.

  3. Expedition Cruises: Viking offers expedition cruises designed to bring passengers to more remote and natural environments. The vessels used in this category are designed with enhanced technology and comfort for challenging travel.

Industry Trends

  • The global luxury travel market is projected to grow substantially over the next decade, with cruise lines being a major component.
  • The demand for upscale, immersive, and experiential travel is increasing, and Viking is strategically positioned to take advantage of these trends.
  • The industry consolidation is ongoing, with larger players seeking to acquire smaller ones, leading to market share changes.
  • The industry is facing significant geopolitical and economic uncertainties, including increased interest rates, inflation, and supply chain issues.
  • Environmental concerns are growing with increasing pressure to reduce emissions and protect natural landscapes.

Moat Analysis Viking’s moat is moderate (3/5) and based on a few key factors, primarily:

  1. Brand Reputation and Customer Loyalty: Viking has built a strong brand and consistently earns high customer satisfaction ratings. The company’s reputation for offering high-quality cruises with curated and unique itineraries creates substantial customer loyalty. Customers are also attracted by a focus on itineraries, which often feature cultural immersion and historical landmarks. Furthermore, a significant part of its sales comes from direct sales, which provides more control over pricing and a more loyal customer base.
  2. Targeted Niche Market: Viking has made its niche on higher end clients who often travel frequently. This creates a moat by capturing a specific and potentially lucrative target customer demographic. They target well-educated English speakers, typically over 55 years old with a high discretionary income.
  3. Proprietary Product Design: Viking has designed and contracted for its ships and amenities. They offer a distinctive style, focusing on a light design and Scandinavian themes. Their newer vessels and experiences such as the Viking Mississippi and Viking Expeditions are less likely to be imitated by competitors.
  4. Established Operational Excellence: In the river cruise business particularly, Viking has created a complex set of logistics to provide a smooth flow of passengers and operations in multiple international locations. This provides higher levels of efficiency and thus higher profitability in the company.

Risks to Moat and Business Resilience Viking faces several risks that could erode its competitive position:

  • Industry Disruption: New business models or disruptive innovation could alter the competitive landscape, which includes new low-cost options that can potentially disrupt the luxury cruise segment.
  • Economic Downturn: A significant economic downturn could reduce demand for luxury travel, hurting Viking’s revenue and profitability. Since it caters to older and wealthier demographics, they are less sensitive to economic downturns, however, the impact would still be felt by Viking.
  • External Shocks: Events such as pandemics, wars, terrorist attacks, natural disasters, and political instability could disrupt operations and impact demand. Recent geopolitical events in the Ukraine and Middle East have shown the vulnerability of cruise lines to major world conflicts.
  • Cost Pressures: While fuel costs have declined, costs related to food, beverages, and labor have risen which can affect profit margins.
  • Dependence on third-party suppliers: Since ships are built and maintained at various partner shipyards, which are outside the control of the company, quality issues or delays in manufacturing and maintenance could affect operations.
  • Over-Expansion: The push for growth, although positive, can result in dilutive acquisitions, increase leverage, and a reduced profitability per unit.
  • Regulatory Changes: Environmental regulations, compliance with international and country-specific laws are a growing burden. Failure to stay up to date or adhere to these could affect operations and create legal problems.

Despite these risks, Viking demonstrates strong business resilience:

  • Brand Loyalty: As mentioned, strong brand and customer loyalty have helped Viking maintain a solid customer base.
  • Focus on Niche Markets: The focus on a relatively affluent demographic is a positive factor as they are less susceptible to economic downturns compared to the mass market.

Financial Analysis

Revenue Distribution:

Viking’s revenue is primarily derived from passenger tickets, and a small percentage comes from onboard spending. In 2022, they generated $4.2 billion in revenue. Revenue is distributed primarily across these regions:

  • North America: 53-60%
  • Europe: 25-35%
  • Other: Remaining

The main drivers of growth are:

  • Increased occupancy of vessels in the short term, and adding new ships in the long term.
  • Increase in the price of tickets and onboard spending.
  • Strategic expansion to new geographies with new cruise lines.

Margins and Profitability:

  • Viking reports operating margins (Adjusted EBITA) in a separate section of their financial reports.
  • The operating margin has seen a considerable decline going from 25% in 2019 to as low as 5.9% in 2020, as bookings fell drastically and the cruise industry was affected. By 2022, the company was starting to recover from these issues with a margin of 25.2% in the full year, as pent up demand brought revenue back.
  • Recent earnings have showed a high improvement and growth trend. In the last six months, they have had record bookings which are significantly higher than their current capacity. They are working to maintain a balance of demand, pricing, and capacity to maximize profitability.

Financials

  • Balance Sheet Health (4/5):
    • Viking’s balance sheet shows solid liquidity with a cash balance of $1.7 billion in December 2022.
    • Total assets are at $8.5 billion.
    • They have good access to credit markets, as evidenced by the recent refinancing transactions.
    • They have also aggressively worked to reduce their costs and improve capacity.
    • Even though their interest coverage is relatively high at 12x, the company is highly levered with over $9 billion of debt. A majority of this debt (around $7 billion) is long term debt. The short term debt is around $1.8 billion. Given current macro-economic conditions, having such a high level of debt puts significant pressure on financials.

  • Their recent financing activities point to future growth opportunities in the cruise market.

  • Cash Flows: The company has volatile but positive cash flows from operations. These are not enough to fully fund investments and growth, and they often take on debt.

  • Capital Expenditures: Viking has high capital expenditure demands, including a large spend on acquiring new vessels. Viking has a large number of outstanding ships in its order book. In the past six months, they have taken delivery of some long anticipated vessels and that trend will likely continue. These expenditures can put a short-term strain on cash flows but lead to long-term growth.

  • Equity: With a debt-to-equity ratio of nearly 2, Viking has high levels of debt.

  • Profitability: The company is profitable, but their margins, while improving, have significant room for improvement as it recovers from the travel bans in the recent period. They also need to manage their costs better to achieve high profitability.

Recent Developments

  • Recent Earnings: Q3 2024 earnings call emphasized record-breaking performance in bookings, strong financial health, and an improved brand reputation. Booking volumes have been higher than the recent capacity expansions. Management noted that the Q4 earnings are trending to be above expectations, given the same conditions. While they do not expect to sustain current growth levels, they expect steady long-term growth.
  • Financial Restructuring: There is an emphasis on debt restructuring to lower interest payments. The management has been actively refinancing its debt for the past couple years to extend the maturities, improve its rate, or capture better provisions.
  • Emphasis on the Viking Brand: The company aims to grow its already strong brand and further develop its image as a unique provider of personalized travel. They are working to highlight features like cultural immersions and onboard educational events.
  • Fleet Expansion: Viking is continuing to receive new ships, which allows them to further explore new geographies.
  • Management Focus: On the call, management noted that their focus is on improving the customer experiences, making the company a highly sought-after brand.

Understandability Rating (2 / 5): Viking’s business model is relatively easy to understand—offering a variety of different types of cruises, however the intricate process of how these boats are actually created, financed, and deployed combined with complicated accounting practices and complex financial statements makes understanding their valuations and financials challenging.