Pandemic ravaged cruise line stocks because of a series of headlines about diseased guests being turned away from ports for several weeks. It would be a mistake to believe that this spells the end for cruise ship stocks.
As tourists return to the seas, many experts see a chance for growth in underpriced cruise companies, which many investors rushed to acquire when the market was at its lowest point, anticipating rewards from its recovery.
During periods of robust economic expansion, cruise line operators often see a substantial increase in share profits; therefore, their stocks may do quite well. Obviously, the opposite is also true, and cruise line stocks may become very dangerous during economic downturns or other external circumstances, such as the COVID-19 pandemic of 2020, the repercussions of which are still being felt today.
During the decade of consistent economic expansion, several cruise line stocks obtained the capacity to distribute capital to shareholders via high dividend increases, making the group of stocks potentially attractive to income investors.
Two of the three main cruise line operators, Royal Caribbean Cruise Lines (RCL) and Carnival Cruise Lines (CCL), used to pay dividends to shareholders until the worldwide pandemic stopped the cruise industry as a whole. The event demonstrated how fragile consumer discretionary stocks could be in difficult situations, and no cruise lines now pay dividends to shareholders.
In addition, while cruise companies continue to operate at reduced capacity, there is no timetable for the reintroduction of dividend payments. Instead, cruise companies prioritize cash conservation to prevent defaulting on debt obligations.
Cruise stocks have ridden out the storm.
It took longer for cruise ships to recover than other tourism sectors such as airline stocks or hotel stocks. Many of the most popular cruise spots did not return until late 2021, just when Omicron dealt another blow.
When reservations resumed in December 2021, the CDC recommended avoiding cruise ships and upped its warning level to 4, or "extremely high."
2 The Russian invasion of Ukraine in 2022 presented another unanticipated setback, which disrupted bookings for Baltic and other European tours3.
However, market analysts concur that the long-term outlook is positive. Bookings to Alaska and the Caribbean are robust, and passengers who cancel their reservations just rebook later in the year. Carnival Corp. reported that bookings for the second half of 2022 exceeded those for 2019; at Royal Caribbean, 2022 bookings are close to 2019 levels; P&O's Caribbean cruise for 2022 sold out within six hours, and Virgin Voyages and Crystal accelerated the release date of their 2023 itineraries due to high demand.
Passenger traffic is projected to increase by 96 percent YOY to 13.9 million in 2021, but this is still below 2019's 29.7 million, while worldwide expenditure across 60 main cruise markets increased by 65 percent YOY to $19.4 billion in revenue.
Should I invest in cruise line stocks?
Consider purchasing any of these cruise stocks if you're ready to take on a moderate amount of risk for substantial gains.
However, investors must be aware that the future of cruising remains unclear, despite the fact that ships are once again sailing.
Before people feel comfortable traveling and going on cruises, it may take some time.
The worldwide economy, hotels, airlines, and cruise lines all anticipate a return to pre-pandemic levels of market performance.
Royal Caribbean Cruise Lines (RCL)
Since its founding in 1969, Royal Caribbean Cruises has expanded into five distinct brands that operate 63 cruise ships. The firm provides consumers with over one thousand unique locations through its varied routes.
Royal Caribbean is the second-largest cruise line in the world, serving six continents. Prior to COVID, the company's yearly sales were around $11 billion, and its current market valuation is $14.8 billion. According to current forecasts, Royal Caribbean's income will surpass pre-COVID levels in 2023.
On May 5, 2022, Royal Caribbean disclosed profits for the first quarter, which were extremely poor but indicated that the corporation is on the road to recovery. The adjusted loss per share was $4.57, nine cents below the consensus expectation. The first-quarter revenue increased from almost nothing in the prior year to $1.06 billion but fell short of estimates by $90 million.
However, the business emphasized that it continues to make progress on its long road to recovery from the COVID shutdown and offered positive comments for the balance of 2022 and beyond.
By the end of the first quarter, Royal Caribbean had returned to service 54 ships across its five brands, representing about 90 percent of its worldwide capacity. Approximately 800,000 visitors traveled with the company's brands during the first quarter, and total revenue per passenger cruise day set a new record. This critical revenue statistic assesses a cruise line's ability to increase the per-guest price; thus, the result is fairly favorable.
The positive operating cash flow of Royal Caribbean in April 2022 marked a turning point for the corporation, which had suffered since the COVID epidemic. Management anticipates that 100 percent of the fleet will be fully operational by the start of the summer season in 2022, a significant milestone on the road to recovery.
The first quarter of 2022 saw more bookings than the fourth quarter of 2021, and bookings rose weekly over the period. In addition, compared to the same times in 2019, which occurred prior to the implementation of COVID, bookings were "substantially" higher for all periods. This indicates the company's optimism for the remainder of the year and into 2023. On this basis, management anticipates that load factors will continue to grow each quarter of this year until they surpass 100 percent by the end of 2022.
All quarters for 2023 are presently booked within historical volume norms but at record price levels. In addition to increasing revenue, this will also improve margins and cash flow. On the basis of these considerations, Royal Caribbean anticipates profitable operations in the second half of 2022.
Royal Caribbean continues to optimize its fleet via the purchase of more fuel-efficient ships and the promotion of onboard spending, as well as the sale of older vessels. This initiative will assist the company in achieving its environmental protection objectives and will also provide substantial advantages to its shareholders. Better sales and margins will result in higher profits and cash flow, everything else being equal.
We anticipate a 7% increase in Royal Caribbean's profits per share over the next five years, based on its current $8.00 per share earnings power. Royal Caribbean assumes the risks of fuel expenses and currency exposure, which are normal for cruise line operators.
Royal Caribbean hedges around fifty percent of its fuel expenses; thus, volatility will be decreased due to this reason. However, currency fluctuations may have a favorable or negative influence on earnings at any moment, depending on the direction of the US Dollar. Royal Caribbean's profits are vulnerable due to the fact that oil and gasoline costs remain at or around record highs.
Since the COVID epidemic, Royal Caribbean's price-to-earnings ratio has declined along with the rest of the industry. This has resulted in the stock being undervalued at the moment, creating an opportunity for longer-term investors who can bear the inherent risk associated with holding a travel-related stock at this time.
The current price-to-earnings ratio of 7.3 compares well with our assessment of fair value, which is nine times earnings. The growing valuation multiple might provide a 4.4 percent tailwind for yearly total returns over a five-year timeframe.
Due to the extra dilution and debt the operators incurred in order to survive COVID, our fair value estimates for the cruise lines are quite low by historical standards. In addition, while the present forecast is optimistic, it is accompanied by substantial uncertainty.
Overall, Royal Caribbean is prepared for total returns of 11.7%, powered by the valuation tailwind and earnings growth of 7%. There is no dividend, and we do not anticipate one in the near future.
Lindblad Expeditions
Lindblad Expeditions (NASDAQ: LIND) is not a normal cruise line, which might make it a safer investment than the majority of cruise stocks. Lindblad specializes in smaller, more costly adventure cruises, whereas competitors handle thousands of guests on each ship. Depending on the excursion, the maximum capacity for these cruises is between 48 and 148 persons.
Lindblad's primary competitive edge is its capacity to provide premium, one-of-a-kind experiences. Lindblad offers thrilling trips across the globe, including Antarctica, the Caribbean coast, and Patagonia. As a result of the sorts of tours provided, Lindblad has developed a dedicated clientele of affluent individuals.
According to Lindblad, most visitors who had canceled or postponed trips due to the pandemic opted for future travel credits over refunds. The travel industry has witnessed a large rise in bookings compared to periods before the epidemic. In its financial results for the third quarter of 2021, the company revealed that 2022 bookings were 51 percent ahead of 2021 bookings and 27 percent ahead of 2020 bookings.
The Walt Disney Company (NYSE: DIS)
Disney's current market capitalization is $323 billion. The company is well-known for its creation of media and entertainment.
After a little decline in March, Disney is now doing better than ever. Much of Disney's worth stems from its entertainment venues.
These include a variety of child- and family-oriented theme parks and cruise ships. Their present performance has been rather surprising, revealing how adaptable, risk-averse, and diversified their stock really is.
By expanding its industrial emphasis, Disney has been able to maintain its progressive progression. With the introduction of Disney+, the firm was able to capitalize on the pandemic's increased demand for video streaming services.
In light of its present overvaluation, analysts anticipate that Disney will provide below-average returns in the next few years.
Norwegian Cruise Line Holdings
Norwegian Cruise Line Holdings (NYSE: NCLH) is well-known for its laid-back attitude and popularity with casual passengers. Norwegian provides "freestyle cruising," in which there are no dress restrictions, specific meal hours, or allocated seats on its cruises.
Norwegian has a range of cabin classifications, allowing it to suit all types of passengers. It was the first cruise line to provide apartments solely for solitary passengers, and it offers accommodations for solo travelers and big families alike.
As its cruises restart, the cruise line has adopted some of the most stringent procedures to prevent COVID-19 outbreaks. It has a vaccination program of 100 percent, which was extended indefinitely in November 2021. Since all guests must be immunized, Norwegian is allowed to provide cruises without masks and without social separation rules.
This cruise line's ability to recover from the epidemic might be aided by pent-up demand. When Norwegian revealed its premium Oceania Cruise brand's winter 2022-23 itineraries, it established a single-day booking record. Norwegian anticipates that all its ships will resume operations by spring 2022.
OneSpa World Holdings Ltd. (NASDAQ: OSW)
OneSpa is a holding company that supplies cruise lines and other enterprises in the hospitality sector with product solutions. Their activities include selling high-end services in the fields of health, beauty, fitness, and wellbeing.
Norwegian, Royal Caribbean, and Carnival are a few cruise lines they serve. OneSpa is one of the leading luxury spa providers for the most prestigious hospitality companies, whether their customers are sailing or stationed at a range of travel and hospitality destinations on land.
OneSpa went public close to the end of 2017. Currently, stocks trade for $10 per stock. Although the stock price has achieved its initial public offering price, the corporation has not yet hit its pre-pandemic highs.
A market capitalization of more than $735 million indicates the company's potential for future growth. Now that cruise ships are again sailing, and their momentum should continue to improve.
Carnival Cruise Lines (CCL)
In 1972, Carnival Cruise Lines was formed as a modest cruise ship operator. Since 1987, the firm has been publicly listed, beginning a lengthy practice of deploying shareholder funds to acquire more cruise lines. Today, it operates around 90 ships under nine distinct brands and generates about $21 billion in yearly revenue pre-COVID. Today, the market valuation of the stock is $15.6 billion.
On March 22, 2022, Carnival announced its numbers for the first quarter, and both sales and profitability were below expectations. The loss per share was $1.66, 38 cents less than anticipated, while sales were $1.62 billion, $640 million less than anticipated. Similar to Norwegian, Carnival generated almost little income in the first quarter of 2017.
The business said that revenue per passenger cruise day increased by 7.5% compared to 2019 and that 75% of total capacity had returned to regular operations. Carnival anticipates positive adjusted EBITDA for the summer season and a loss for the whole year despite a profit for the third quarter.
We assess Carnival's earnings power at $2.25 per share but anticipate a 7 percent increase in the next few years. The company's fleet optimization approach has resulted in a more fuel-efficient fleet that also optimizes onboard expenditure. Both of these factors contribute to increased profits, and Carnival sees healthy ticket demand in terms of both volume and price.
Carnival's shares trade at a discount of 6.2 times earnings power compared to our fair value estimate of nine times earnings. This might provide a 7,7 percent tailwind to the value in the years to come, and in combination with the predicted profits growth of 7 percent, we anticipate future annual returns of 15,2 percent.
As of the conclusion of the first quarter, Carnival had $29 billion in net debt, indicating that it is heavily leveraged. In light of this, Carnival faces a greater risk and will find it more difficult to finally pay dividends to its shareholders. We feel Carnival is the furthest away from being able to return cash to shareholders; therefore, potential purchasers should bear this in mind.
Final thoughts
The exceptionally high anticipated rate of return for the three largest cruise line stocks implies a long-term restoration to regular operations. Future returns are also reliant on their reduced valuation multiples, which might increase if the coronavirus epidemic is halted as quickly as possible.
Obviously, there is no assurance that this will occur in the near future. Consequently, investors may anticipate prolonged volatility in the main cruise line stocks. If these cruise line stocks can return to growth, their reduced values might make them attractive investments, but investors must practice patience.
We advise investors to have a long-term perspective when evaluating cruise line stocks. Given these characteristics, we believe that Royal Caribbean is now the best stock for long-term income investors among cruise line operators.
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