As a subsector within travel, cruising has proven to be a great model with macro tailwinds at its back. The baby boomers are aging and retiring with sizable nest eggs, as the strong market performance — post-financial crisis — has left them with time and money. Cruising has proven to be an attractive all-inclusive way to travel and a preferred way for boomers to vacation.
Cruiseliners take the hassle out of planning a two-week international vacation. They eliminate the headaches of doing research and coordinating logistics. They handle on-board and off-board entertainment and keep the food and drinks rolling 24/7. It makes sense then that cruise stocks have performed extremely well over the past five years and trade at reasonable price-to-earnings multiples in the low double digits.
Recently, as a group, cruise stocks have seen a strong rebound off December lows. Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) is up 29% for the year, Royal Caribbean Cruises Ltd (NYSE:RCL) is up 16% and, up until this week, Carnival Corp (NYSE:CCL) stock had posted gains of almost 15%.
However, after Carnival reported first-quarter numbers and revised 2019 fiscal guidance downward, that 15% gain has dropped precipitously to just 4%. RCL and NCLH moved slightly downward in parallel but have not sustained the same price decline. With CCL being the largest of the three in terms of fleet size, revenue, and market capitalization it can act as a leading indicator for what lies ahead.
The future looks uncertain.
2019 Cruise Stock Outlook
From an operational vantage point, CCL bookings data was decent per first quarter earnings:
“At this time, cumulative advanced bookings for the remainder of 2019 are ahead of the prior year at prices that are in line with the prior year on a comparable basis. Pricing on bookings taken since January have been running in line on a comparable basis to the prior year while booking volumes are ahead compared to the prior year.”
On a constant currency basis, net cruises revenues are expected to up around 5.5% and costs, excluding fuel, are consistent with last year. The stumbling point has been fuel prices and currency rates, leading full-year 2019 adjusted EPS to be $4.35 to $4.55, as compared to December guidance of $4.50 to $4.80.
So, overall, booking trends don’t look bad by any means. But given the uncertainty around further erosion of EPS numbers due to fuel and currency fluctuation, the primary support for already high share prices may just be CCL’s commitment to share repurchases, which have totaled nearly $5 billion since late 2015.
The X Factors
Fuel and currency headwinds have been the major drag on earnings over the past couple of quarters. Volatility in these areas has the potential to negatively impact future quarterly numbers. Cruise companies show most metrics, excluding fuel costs, but it’s important to be cognizant of this major expense that can dramatically swing earnings as CCL demonstrated.
While we know that, for the year, RCL is hedged 58% on fuel and NCLH is hedged 63% on heavy fuel oil (“HFO”) and 43% on marine gas oil (“MGO”), the former more commonly used due to lower prices, but CCL does not disclose the extent of their fuel hedges.
This leaves all cruise stocks vulnerable to further drags on earnings, especially if you share a less sanguine view on oil prices. This falls into the category of known unknowns. Until there is more clarity on future currency rates and fuel price direction, I remain cautious on cruise stocks.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.