Cruise Industry Thrives While Traveler Deals Fade: Investors Can Secure Prime Cabins in Company Shares
Planning a dream cruise vacation? While the golden age of steep discounts and sparsely populated decks has passed, the industry itself is charting a course for record-breaking success. With ships filling to capacity and prime cabins disappearing fast, securing a last-minute bargain might be a gamble. However, for savvy investors, the picture looks decidedly brighter. Cruise line stocks present a compelling opportunity, even for those who don't mind a bit of market volatility.
"Wave season," the annual period known for the best cruise deals, is nearing its end. This year, however, the narrative shifted dramatically. Cruise executives enthusiastically communicated surging demand to Wall Street, a message initially met with skepticism by analysts. Most covering industry leader Carnival held a "sell" or "hold" rating in early 2023. This proved a costly oversight. Carnival, along with Royal Caribbean and Norwegian Cruise Line Holdings, became the top performers in the S&P 500 during the second quarter, highlighting the industry's robust recovery.
While Royal Caribbean has impressively sustained its rally, nearing pre-pandemic levels, Carnival and Norwegian Cruise Line Holdings remain below their peak by more than half. However, with the industry on track for its most successful wave season ever, further growth seems inevitable for all three giants.
Cruises have always excelled at offering unbeatable value compared to land-based vacations. This advantage becomes even more pronounced during economic downturns. Due to their unique operating model, last-minute deals become an attractive option for cruise lines rather than leaving cabins empty. Even in today's environment, cruises continue to deliver exceptional bang for your buck. Compared to the cumulative costs of hotels, flights, dining, and vacation rentals, cruises remain a cost-effective option.
Carnival CEO Josh Weinstein confidently asserts, "We are nowhere near our ceiling when it comes to the price environment." This bullish outlook is backed by the industry's impressive adaptation. Cruise lines have become operationally leaner and adept at maximizing revenue. Onboard sales, particularly high-margin items like drink packages and shore excursions, represent a significant portion of revenue – often booked before the ship sets sail. Royal Caribbean's CEO, Jason Liberty, enthusiastically shared a 40% increase in pre-cruise revenue bookings for 2024 compared to the previous year.
Net yield, the profit per passenger per day after factoring in travel agent costs and other operational expenses, serves as a potent indicator of current profitability compared to pre-pandemic times. Royal Caribbean, fresh off the launch of the world's largest cruise ship, Icon of the Seas, reported an impressive 18% increase (adjusted for currency fluctuations) in net yield compared to the fourth quarter of 2019.
The booming business translates into record passenger numbers, another sign of a robust market. According to analyst Michael Erstad, Royal Caribbean cruises are being booked 202 days in advance on average, an 11% increase compared to pre-pandemic figures.
However, a significant caveat exists. Cruise lines relied heavily on debt to weather the pandemic storm. Between 2019 and 2022, the net debt of the three major players doubled to a staggering $63 billion. All three carry junk credit ratings. Yet, there's light at the end of the tunnel.
Carnival's "SEA Change" initiative outlines a set of investor-friendly financial targets. The most intriguing one focuses on a 50% increase in a company-specific measure of profitability by 2026 compared to previous projections. This translates to increased cash flow dedicated to debt reduction. Furthermore, Carnival's order book for new ships remains remarkably small, a deliberate strategy to minimize capital expenditure. Analyst forecasts predict Carnival's free cash flow to double by 2027.
Royal Caribbean stands out for its adept pandemic navigation. Moody's upgraded their debt twice in the past year. Despite having fewer ships and revenue compared to Carnival, its market value has surpassed Carnival's by one-and-a-half times, a remarkable turnaround.
For risk-tolerant investors seeking the most compelling opportunity, Carnival presents itself as the undisputed champion. On a debt-adjusted basis, its stock remains the cheapest among the three giants. Furthermore, all three major cruise lines still trade below their pre-pandemic 10-year average when measured by forward Ebitda (earnings before interest, taxes, depreciation, and amortization). This discrepancy suggests significant room for growth.
The current momentum in the cruise line industry shows no signs of abating. While short-term volatility is always a possibility, the long-term outlook remains incredibly promising. With a record-breaking wave season on the horizon, leaner operations driving profitability, and a clear path towards debt reduction, cruise line stocks are well-positioned to weather potential economic storms and deliver exceptional returns to investors with a taste for adventure.
