Are There Smoother Seas Ahead for Cruise Line Stocks?

by Traders Reserve | February 5, 2014 3:17 pm

Another Royal Caribbean (RCL) cruise ship had to cut its trip short due to a virus outbreak on Thursday. Just a week earlier, another of its fleet had returned to shore carrying as many as 1,000 sick people—the highest number on any cruise in two decades.

These back-to-back occurrences are part of a string of ill-fated trips over the past couple of years for the liner.

Royal Caribbean isn’t the only cruise line with an image problem.

In 2012, Carnival’s (CCL) Costa Concordia sank in calm waters outside the coast of Italy, taking 32 peoples’ lives with it. A year later, an engine fire started in the Carnival Triumph leaving the ship without power, enough food and unsanitary conditions. And a 6-year-old boy drowned in a pool aboard the Carnival Victory that led travelers questioning safety and canceling bookings.

While Carnival and Royal Caribbean have safety and health issues, Norwegian Cruise Line (NCLH) doesn’t score very well on, where travelers rate their experiences. Rated a 3 out of 5, many complain about the poor quality of food but enjoy the nightlife. Considering cruise experiences tend to revolve around cuisine, the subpar ratings aren’t exactly conducive to selling more tickets.

Even if you’re sitting somewhere watching the snowdrifts build outside your window and dreaming about balmy weather and tropical breezes, I can’t imagine any of the above possible experiences would be very enticing.

Well, the cruise line industry is working hard behind the scenes to regain your trust and confidence as customers. If successful, 2014 year could be a very good year. In fact, Cruise Lines International Association (CLIA) expects the number of passengers to rise from 21.3 million to 21.7 million year-over-year.

As a result, fleets are growing in numbers and size. There are now 16 more ships than a year ago (410) and in the next two years, another 24 ships at a total cost of $8 billion will set sail to meet the demand of 37,546 more passengers.

If business begins to boom so will cruise line stocks, so it may be time to get aboard—as long consumers keep spending. An economic bust of some sort would certainly be enough to sink the industry.

Here’s how three big companies are faring:

Royal Caribbean

Royal Caribbean[1]As a way to make things right for passengers on its most recent sickening cruise, Royal Caribbean has promised a 50% refund of their cruise fare and a 50% future-cruise credit. Whether the rebate will be enough to right the wrong for that group is anyone’s guess.

Prior to the second episode, Andy Brennan, an analyst with IBISWorld, said he didn’t think shares of RCL would suffer for three reasons: the company dealt with the issue quickly; it’s not as bad as other recent problems, and it doesn’t seem to be grabbing as much media attention.

He added, however, if the incident lingers in the news or another mishap happens quickly, then the price is likely to fall.

In the meantime, Royal Caribbean is launching the 4,180-passenger Quantum of the Seas, the largest of the 16 new ships going out to sea this year. RCL also saw earnings per share grow 21.8% last year with estimates for 36.7% in 2014. It also offers a dividend of 2%, something neither other company does.


CARNIVAL[2]You would expect that a cruise line with the poor safety record of Carnival wouldn’t lead in market share, but it does. At the end of 2013, the brand cornered 21.2% of it while Royal Caribbean owned 16.4%. Of course, that could change as the year wears on.

Its poor track record did little to affect shares of stock, however, as they reached a 52-week high of $41.58 on Jan. 15 after posting impressive fourth-quarter fiscal 2013 results. The 4 cents per share increase in adjusted earnings was attributed to increased cruise sales thanks to higher ticket prices and onboard spending.

Though the company expects to incur a loss in fiscal first quarter 2014, it expects to return to profit by the end of the year.

Norwegian Cruise Line

norwegian.logo[3]Compared to Carnival and Royal Caribbean’s ills, Norwegian is in tip-top shape. I wouldn’t be surprised if the back-to-back cruises cut short by norovirus results in more passengers and higher stock prices, but only in the short-term.

While Norwegian owns a single cruise line directed to passengers looking for a bargain, the other two own 10 each and market to both luxury and bargain driven travelers. The company needs to either beef up its fleet or announce something innovative to drive sales.

Norwegian is launching the second largest ship, behind Royal Caribbean’s this year, a 3,969-passenger called Norwegian Getaway.

Norwegian’s stock is up 41% since going public early last year.

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