Full Steam Ahead for RCL, Cruise Stocks

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When I read that Royal Caribbean (RCL) was forced to cut one of its cruises short, it brought back memories, not very pleasant ones, of my last cruise when my family and I experienced a minor norovirus outbreak on a Carnival (CCL) ship before the largest cruiseship operator became notorious for it.

Though it wasn’t pleasant, it wasn’t the end of the world either. And it won’t dissuade me from going on a cruise or buying the shares of the industry’s players because RCL, CCL and Norwegian Cruise Line Holdings (NCLH) all have room to run.

RCL Stock Showing Strength

Indeed, RCL, whose shares have jumped nearly 30% over the past year, reported an outstanding quarter thanks to strong demand for sailing in Asia and Europe and gains in onboard revenue from attractions such as casinos.

In the quarter ended Dec. 31, Royal Caribbean reported net income of $7.02 billion, or 3 cents per share, reversing a year-earlier loss of $392.8 million, or $1.80 per share. Excluding one-time items, profit was 23 cents, above the 19 cents analysts expected. Revenue was little changed at $1.85 billion.

Clearly, RCL is being hurt by tsunami of negative news that has engulfed CCL for the past few years, but RCL stock is weathering that storm quite well. Indeed, RCL ratcheted up its annual guidance to $3.20-$3.40 per share, better than analysts’ expectations of $3.19 and an increase from an earlier forecast of $3.06.

The publicity surrounding Royal Caribbean has been especially rough. Who can forget the “poop cruise” headlines? A few months later, CNN uncovered even more damaging information about the Carnival Triumph, noting that there were serious concerns about the vessel months before a fire knocked out its power and it sailed into infamy.

No wonder Carnival is planning to spend $700 million upgrading its fleet.

Nonetheless, there is plenty of reason to be optimistic about the cruise industry. For one thing, cruising is a cost-effective way to see many destinations in one area such as the Caribbean. It gives vacationers the most bang for their buck.

According to Cruise Market Watch, passenger volumes will grow at a compound annual growth rate at 7% through 2018. A whopping 167 new ships have been added since 2000.

The market is underserved — only about 24% of the U.S. population have taken a cruise — and Royal Caribbean is poised for growth. Cruise Market Watch estimates its market share at 22.7%, second only to Carnival. The company is scheduled to add new ships from 2014 to 2016 and is in the midst of upgrading its entire fleet including staterooms and restaurants.

But the rising tide that’s lifting Royal Caribbean is also helping Carnival…

CCL Stock and NCLH Stock Get Boosts

CCL stock, which has gotten pounded by the negative publicity, rebounded recently — surging nearly 14 percent over the past three months. According to Zachs, 11 Wall Street analysts have boosted their forecasts for the company’s yearly profit.

Another reason for investors’ optimism about Carnival may be the new CEO Arnold Donald. “We have huge opportunities to take advantage of our scale, in terms of creating demand and creating new revenue,”  he told Bloomberg News.

Unfortunately for investors, Carnival is so desperate for travelers that it has slashed prices to the bone. Cruises can be found for as low as $27 per night, about the price of a roadside motel. While that may be great for travelers, that raises some concerns for investors about margin pressures, which have so far proven to be without foundation. Indeed, Carnival noted one reason why it posted better-than-expected non-GAAP earnings was higher-than-expected ticket prices.

There is smooth sailing  ahead for Norwegian Cruise Lines, which has pioneered “freestyle cruising”, which allows passengers to do what they want when they want. This is a great option for travelers whose idea of fun doesn’t involve getting dressed up for dinner. NCLH also is benefiting from the strong performance of the new ship the Norwegian Breakaway. It also will gain some market share at CCL’s expense.

Cruise Stocks Making a Comeback

Turning to valuation, arguments that can be made for all three stocks, though NCLH is the best bet here. Carnival offers the least compelling value. Shares of the company have risen 4 percent this year, underperforming RCL and NLCH, which both have posted double-digit gains. CCL trades above its average 52-week price target of $35.34 and is valued a forward price-to-earnings ratio of 23, the most expensive in the industry.

RCL’s  multiple is a more reasonable 15 while NCLH is valued at 25. Unlike RCL, NCLH trades above its average 52-week price targets. However, NCLH also offers the best growth potential among the group, with double-digit revenue growth forecast for the current quarter.

Even so, the economy’s rising tide will lift the cruise industry and will benefit all the players — even Carnival, as it deals with some huge issues. Wall Street is underestimating its potential for growth. The time to buy these stocks is now before they set sail for higher valuations.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.


Article printed from InvestorPlace Media, https://investorplace.com/2014/01/full-steam-ahead-cruise-stocks-ccl-rclnclh/.

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