To hear the Cruise Lines International Association tell it, the industry never has had smoother sailing. In a recent survey, the industry’s main marketing group found that 36.1 million Americans plan to take a cruise in the next three years — up from 33 million in 2008. And cruise line passengers fall into the prized “upscale” demographic: middle-aged college graduates with a median household income of $97,000.
Add to that solid second-quarter earnings for Carnival Corp. (NYSE:CCL), Royal Caribbean (NYSE:RCL) and Norwegian Cruise Lines, which last month filed an IPO for the second time in nine months and hopes to trade as NCLH on the Nasdaq later this year. All three cruise lines have benefited from increased capacity, higher ticket revenue and a boost in passengers’ shipboard spending.
But despite these trends, investors are reluctant to raise anchor on cruise line stocks. Carnival shares set a new 52-week low of $28.96 on Aug. 19. At $30.88, CCL is trading more than 35% below its 52-week high of $48.14 in January. Royal Caribbean also set a new 52-week low last week of $22.30. At $23.26, RCL is trading nearly 54% below its 52-week high of $49.99 in January.
The two stocks have several things in common — some positive, some not. Both companies boast low price/earnings-to-growth ratios — CCL is 0.93 and RCL is 0.61, indicators that both stocks are undervalued. They also pay dividends: Carnival has a dividend yield of 3.4%; Royal Caribbean is a more modest 0.4%.
But both cruise lines also carry a lot of debt: Carnival has total cash of $557 million compared to total debt of $9.84 billion; Royal Caribbean has total cash of $551.46 million and total debt of $8.60 billion. That’s a challenge common to the industry. Paying down debt is one big reason Norwegian Cruise Lines is taking another run at an IPO — it hopes to raise at least $250 million.
Here are three reasons that cruise line stocks might be starting to sink:
Cruise line earnings are dependent on a wide variety of factors beyond a company’s control — foremost among them political turmoil and bad weather. Revenues from Mediterranean cruises already have been clobbered due to conflicts in Libya, Tunisia and Egypt. With Hurricane Irene bearing down on the U.S. Eastern seaboard, more than a dozen ships have been forced to change or delay itineraries. And CCL is still feeling the pain from the March 11 disaster in Japan.
Fuel Price Volatility
While the price of oil continues to slip, cruise lines still face the scourge of fuel price volatility. Norwegian Cruise Lines’ fuel costs were more the 17% higher in the second quarter than they were a year ago. Fuel accounted for a bigger share of RCL and CCL expenses as well.
Since cruise lines’ target demographic is the affluent consumer, they should take comfort that luxury shoppers are driving growth in high-end retail stocks. After all, those same shoppers should boost cruise line profits. But here’s the thing: That same group also is heavily invested in the stock market and well aware of its recent roller coaster ride. While affluent buyers made nervous by the market’s fits and starts still might plunk down $800 for an irresistible pair of Manolo pumps, they might pass on that 12-day Mediterranean voyage from Barcelona.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.