Cruise Line Stocks About to Run Aground

by Lawrence Meyers | October 4, 2012 12:54 pm

Despite the significant increase in occupancy and revenues at hotels like Ashford Hospitality Trust (NYSE:AHT[1]), and theme parks like those owned by Cedar Fair, L.P. (NYSE:FUN[2]), cruise lines just cannot get out of shallow waters.

Carnival Cruise Lines (NYSE:CCL[3]) recently unleashed a third-quarter earnings report that didn’t disappoint analysts, though it was pretty disappointing overall[4]. CCL saw a 5.3% decrease in revenue, which was better than the firm’s internal guidance of 6% to 7%, while earnings fell 9.5% year-over-year to $1.53 per share.

The culprit is ticket pricing, as that segment’s revenue fell 8.9%. Apparently, people aren’t willing to pony up bigger bucks for cruises, but are comfortable with the few hundred they’ll spend at a theme park.

Although Carnival expects a rebound on ticket prices next year, they also are dealing with rising fuel costs. I’d also suggest that CCL should not be so optimistic about next year. Economic signals are suggesting storm clouds ahead. With durable goods orders falling 13.9% and the Purchasing Managers Index below 50 for the first time since 2009, the red flags are a-rising. That’s going to translate into a tightening of consumer spending, which will not bode well for Carnival.

Carnival generated just more than $300 million in free cash flow and is saddled with $8.2 billion in debt. That debt is very low-interest, but the cash flow it does generate is being largely paid out as a dividend. I don’t see how it will make a dent in that debt anytime soon, and if the economy does turn south, that free cash flow may dry up and endanger the dividend. At 20 times earnings, I think Carnival is way too risky.

Nor am I thrilled with competitor Royal Caribbean Cruises (NYSE:RCL[5]), while we’re at it.

Royal Caribbean doesn’t report until later this month, but last quarter’s 3% revenue increase was not enough to offset soaring fuel and operating costs, which resulted in a 45% decline in operating income, a 75% six-month year-over-year decline in earnings, and a loss in the last quarter. The company only has $30 million in free cash flow over the trailing 12 months, and that’s against $7 billion in debt. It also seems mighty risky at 17 times earnings.

If you want exposure to cruise lines for whatever reason, then your best bet is to just buy Walt Disney (NYSE:DIS[6]) — which really is the all-weather entertainment stock[7], if you ask me. Disney’s holdings are so diversified, and its cruise line gets stellar reviews, that it’s the kind of “forever hold” stock you want in your portfolio.

Otherwise, you’re better off staying put at the pier.

As of this writing, Lawrence Meyers[8] did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc.[9], which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at[10]. He also has written two books[11] and blogs about public policy[12], journalistic integrity[13], popular culture[14] and world affairs[15].

  1. AHT:
  2. FUN:
  3. CCL:
  4. pretty disappointing overall:
  5. RCL:
  6. DIS:
  7. the all-weather entertainment stock:
  8. Lawrence Meyers:
  9. PDL Capital, Inc.:
  11. written two books:
  12. public policy:
  13. journalistic integrity:
  14. popular culture:
  15. world affairs:

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