Cruise stocks have been on a wild roller-coaster ride in 2020.
First, the big drop. Then, the big rebound. Most recently, another big drop, on fears that a “second wave” of the novel coronavirus is emerging across the U.S.
What comes next?
A big and sustainable rally, meaning now is the time to buy cruise stocks.
The logic is simple. Over the past few weeks, we’ve had: 1) arguably the most controversial filmed police killing of all time, 2) tons of protests and riots across the country, including some that have turned violent and forced store closures and 3) a sharp uptick in confirmed coronavirus cases across several states.
Through it all, the U.S. economic recovery has persisted. Consumer mobility has increased. Restaurant and store foot traffic has improved. Consumer search interest in all things travel related has only grown. Overall economic activity has sustainably perked up. The stock market has kept ticking higher.
Under the hood, what’s happening is that “cabin fever” is finally getting to consumers and “nearly bankrupt” businesses are desperate to get back to some semblance of normal. As such, consumers and businesses alike are both increasingly learning how to keep the world turning while simultaneously managing Covid-19 risks via things like social distancing, plastic barriers and mask-wearing.
Both parties will get better at this balancing act over the next few months. As they do, the human costs of the virus will remain relatively mitigated, while economic and social activity will continue to perk up.
Against that backdrop, stocks will keep rallying — especially recovery-sensitive, mobility stocks, like cruise stocks.
To that end, the best cruise stocks to buy as the world gets back to “normal” are:
Let’s look at what makes each worth considering in this post-Covid-19 world.
Cruise Stocks to Buy: Carnival (CCL)
The world’s biggest cruise line operator, Carnival, doubles as one of the best cruise stocks to buy now.
By my numbers, CCL stock could rally 70%+ over the next 18 months.
Of course, fiscal 2020 for this company will be awful. For more than half of the year, the company will run zero cruises. For the other half of the year, cruise capacity will be significantly depressed — if those planned cruises run at all.
Fiscal 2021 will be a much better year. Consumers will get more comfortable with riding on cruises, especially if prices remain discounted and if a vaccine is approved by early 2021. Concurrent to that, Carnival will increase cruise capacity. The company’s revenues and profit margins will meaningfully rebound.
By fiscal 2022, things should be largely back to “normal” for Carnival. The virus will be more than two years old. The vaccine will have been in circulation for more than a year. Global travel trends will start to look like they did in 2019.
Assuming so, Carnival’s fiscal 2022 revenues should be awfully close to where they were in fiscal 2019 (approximately $21 billion). Profit margins won’t rebound to where they had been historically — roughly 17% average operating margin from 2015 to 2019 — but should recover to a lower steady-state around 10% to 12% thanks to higher cleaning and maintenance costs.
Under those assumptions, $2.40 seems like a doable earnings per share target for Carnival by 2022. CCL stock historically trades at 13-times forward earnings.
That combination implies a fair 2021 price target for CCL stock of over $31 — or more than 70% above where shares trade today. All of that together makes Carnival one of the best cruise stocks to consider buying now.
Royal Caribbean (RCL)
Royal Caribbean has seen its stock price drop 30% on second wave fears. Now, the cruise line stock will rebound by more than 50% as those fears abate and business trends recover over the next 12 to 18 months.
Royal Caribbean’s 2020 will be a wash. We all know that. But management has said that 2021 bookings are trending in a “normal” range, implying that next year could be a huge bounce-back year for the cruise line operator.
Assisting that bounce-back will be a potential Covid-19 vaccine in early 2021, low travel prices, potential travel subsidies, pent-up demand and increasing consumer confidence that virus risks can be managed … even on a cruise ship.
Still, it will likely take another year until cruise travel trends fully recover. Assuming so, by 2022, Royal Caribbean’s revenue profile should look a lot like it did in 2019.
Fiscal 2019 revenues were around $11 billion. Fiscal 2022 revenues should recover to roughly $10.5 billion. Operating margins in 2019 were about 19%. They should rebound to 15% in 2022, with that four point delta accounted for in increased cleaning spend.
Under those assumptions, my modeling suggests $6 in 2022 earnings per share is doable. Based on a historically-average 13-times forward earnings multiple, that implies a 2021 price target for RCL stock of $78.
That’s up about 50% from where RCL stock currently trades.
Norwegian Cruise Line (NCLH)
Last, but not least, on this list of cruise stocks to buy is Norwegian Cruise Line.
My base case for Norwegian broadly follows my base case for Carnival and Royal Caribbean.
That is, a really bad year in 2020, followed by a strong recovery in 2021, and a further recovery in 2022 to traffic and revenue levels nearly on par with 2019 levels. Profit margins concurrently recover. But settle out at levels materially below where they were in 2019, thanks to higher cleaning and maintenance costs.
That mental framework pegs Norwegian’s 2022 revenues around $6 billion, and its profit margins around 10% to 12%.
Under those very basic and reasonable assumptions, my modeling suggests that by 2022, Norwegian’s earnings per share could rebound to $2.50, which is well within the range of Wall Street’s estimates. Based on a historically average 12-times forward earnings multiple, that implies a 2021 price target for NCLH stock of $30.
NCLH stock trades hands at $18. Thus, shares have visible runway to more than 65% upside over the next 18 months.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.