Cruising is one of the worst performing industries in 2022. Most cruise stocks are underperforming the index and are currently trading near their 52-week lows. This might sound paradoxical, as cruise companies are delivering solid growth in revenues. Most companies have strong order books, rising occupancy rates, and considerable increases in customer deposits. In fact, cash generated from higher customer deposits has kept them going so far.
However, rising fuel prices driven by inflation and increased debt burdens due to Covid-19 have put the industry under pressure. The industry came to a complete standstill in 2020 when the government imposed restrictions on travel and social gatherings in an effort to curb Covid-19 infections. Hence, cruise companies were compelled to borrow funds in order to survive.
With the Federal Reserve hiking its funding rate by 75 basis points to 1.5% to 1.75%, the highest in two decades, there’s a possibility of a recession. Generally, demand for leisure falls during an economic slowdown as people tend to spend less on discretionary items.
On a positive note, a strong job market, higher household savings, and pent-up demand for travel from the Covid-19 pandemic shutdowns should keep the industry sailing. As most of the cruise company’s stock prices are already battered down, investing in these stocks has become attractive.
Here is a list of seven companies that are expected to perform well over the long term:
|RCL||Royal Caribbean Cruises Ltd.||$32.73|
|NCLH||Norwegian Cruise Line Holdings Ltd.||$11.22|
|LIND||Lindblad Expeditions Holdings, Inc.||$8.01|
|OSW||OneSpaWorld Holdings Limited||$7.02|
|CRUZ||Defiance Hotel, Airline, and Cruise ETF||$14.95|
|DIS||The Walt Disney Company||$94.15|
Cruise Stocks: Carnival Corporation (CCL)
Carnival Corporation (NYSE:CCL) is the largest cruise operator, sailing 91 ships across ten cruise line brands with a total capacity of 243,180 berths. The company derives 55.8% of its revenues from its services in the North American region, followed by Europe at 42.5%, Australia and Asia at 0.9%, and other regions at 0.7% at the end of fiscal 2021. The majority of the revenues are generated from providing on-board services, which accounted for 61% of revenues in 2021, with the rest coming from ticket sales.
Most recently, CCL reported positive developments in its second quarter (Q2) 2022 business update. Total revenues increased almost 50% from the first quarter to $2.4 billion, driven by a strong demand for cruises. Reflecting this, occupancy rates have increased to 69% from the 54% reported in the last quarter.
Management noted total bookings for future cruises have doubled in Q2 2022 versus Q1 2022, marking the best volume since the beginning of the pandemic. As such, CCL is bringing more ships into service in order to cater to the higher demand.
Despite a strength in demand, the bottom line remains weak due to a significant amount of leverage. It will take time for the company to recover as it is still not operating at full capacity. However, if demand continues to be upbeat, the cruise line has the capacity to recover soon.
Royal Caribbean Cruises (RCL)
Royal Caribbean Cruises (NYSE:RCL) is the second-largest cruise line operator in the world after Carnival Corporation, with 61 ships with a total capacity of 137,930 berths as of the end of 2020. The company operates three cruise lines: Royal Caribbean International, Celebrity Cruises, and Silversea Cruises.
During the first quarter business update, management disclosed that RCL’s advanced booking volumes have surpassed the record levels achieved in 2019 by 40%, lending optimism to future growth prospects. As RCL commences full-fleet operations during the year, management hopes to return to full profitability by the second half of 2022. The company already achieved a positive operating cash flow in the month of April 2022.
Royal Caribbean launched two ships, Wonder of the Seas and Celebrity Beyond, in the first quarter and second quarter, respectively.
As the company has stepped-up efforts to overcome staffing shortages, it should be able to operate uninterruptedly.
Cruise Stocks: Norwegian Cruise Line (NCLH)
In terms of fleet size, Norwegian Cruise Line (NYSE:NCLH) is the third-largest cruise operator in the United States. The company operates 27 ships with about 58,400 berths that sail across 490 destinations in North America, Europe, Asia Pacific and other regions.
In May 2022, the company announced it would resume sailing all its cruise ships to meet rising demand. With its full fleet back in service, management expects NCLH to generate positive operating cash flow in the second quarter.
Booking trends remain upbeat, exceeding pre-covid levels. As a result, it is ramping up its capacity to take nine more ships through 2027. Management expects occupancy rates to improve amid high demand and hopes to achieve record net yields for the full year of 2023.
With limited operational capacity and strong demand, the company is gaining through higher pricing, mostly driven by on-board bundled offers.
Lindblad Expeditions Holdings (LIND)
Lindblad Expeditions Holdings (NASDAQ:LIND) works with National Geographic to explore natural environments through its state-of-the-art exploration tools. The company’s expeditions are generally educational and promote learning through interaction with leading scientists, naturalists, and researchers to offer conservation of natural habitats and wildlife.
The company provides expedition cruising and adventurous travel opportunities through its fleet of ten owned expedition ships and five seasonal charter vessels. Most of its guests are small groups of affluent people who are extremely loyal. Around 40% of its guests return each year. Most of its expeditions are expensive, ranging between $5,000 and $25,000, depending on the itinerary.
Like others, the company’s business was hard hit during the pandemic. However, it is now experiencing a steady increase in revenues and future bookings. At the end of Q1 2022, revenues surpassed consensus estimates by $10.7 million to register $67.8 million, led by an increase in expeditions and trips.
With rising environmental awareness and a need to preserve the environment, demand for such expeditions should grow. LIND stock should stand to benefit.
Cruise Stocks: OneSpaWorld (OSW)
OneSpaWorld (NASDAQ:OSW) is the largest provider of health and wellness services on board in the world. It offers services such as spa, salon, skincare, beauty products, fitness facilities, and specialized fitness classes. The company operates a fleet of 171 cruise ships across 51 destination resorts around the world.
The company’s revenues have been growing consistently over the last five quarters. It also delivered positive adjusted EBITDA and a better-than-expected cash burn rate. Given higher demand, management expects to commence service on 12 new ships, bringing the number of total fleets to 174 ships by the end of Q3 2022.
OSW ended the quarter with $30.9 million in cash and $13 million available under its credit facility. Given its cash burn rate of $1.9 million in Q1 2022, it has sufficient liquidity to carry out its business plans. As long as leisure cruising remains upbeat, the company’s performance will improve further.
Defiance Hotel, Airline, and Cruise ETF (CRUZ)
Defiance Hotel, Airline, and Cruise ETF (NYSEARCA:CRUZ) is an exchange-traded fund (ETF) focused on investing in companies that derive at least 50% of their revenues from the passenger airline, hotel and resort, or cruise industries. Investors might find it lucrative to invest in the ETF as it diversifies investments across different companies without having to invest a large sum of money.
In addition, an ETF fund eliminates the need to have a fund manager as it is rule-based.
The ETF has investments across some of the most well-known cruise companies. Given its lower expense ratio of 0.45, it makes sense to invest in the fund.
Cruise Stocks: The Walt Disney Company (DIS)
The Walt Disney Company (NYSE:DIS) is a highly diversified entertainment company. The company operates Disney theme parks and resorts, distributes media and entertainment, and sells branded merchandise, books, and magazines through retail, online, and wholesale businesses. It has also set up a cruise line operation as its subsidiary.
Disney has a track record of delivering solid growth in revenues and profits. The company’s Disney+ and other streaming services have gained significant consumer traction in the past couple of years.
With the economy normalizing and a pent-up demand for travel, the company plans to expand its cruise line business by adding three more ships this year.
The average analyst rating on the stock is a “strong buy.” The average price target is $140.09, representing an upside potential of 48.56% from the current price as of writing.
On the date of publication, Sakshi Agarwalla did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.