The travel industry thrives on the continued demand for leisure travel and the rapid adoption of advanced technologies. For reasons discussed throughout this article, I think it could be worth watching Royal Caribbean Cruises Ltd. (RCL) for an attractive entry point, but Norwegian Cruise Line Holdings Ltd. (NCLH) could be best avoided now.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in the cruise travel industry.
Cruise ticket prices are rising due to increased post-pandemic demand. This surge negatively impacts consumers as prices surpass pre-pandemic levels, potentially signaling a sustained trend with further increases, making cruises less affordable.
The U.S. Cruise Market Report anticipates substantial growth in 2023 with a 90% revenue increase over 2022, yet the industry's recovery remains below 2019 levels. Ongoing challenges like debt, inflation, recession, fuel price hikes, supply chain disruptions, and geopolitical tensions present risks to sustained industry rebound.
However, cruise vacations, appealing to diverse demographics, are gaining popularity due to their unique experiences, convenience, and the ability to explore multiple destinations and activities in a single trip. This year, the revenue in the U.S. cruise market is expected to be $12.50 billion. The revenue is expected to expand at a CAGR of 10.1% to reach $18.36 billion by 2027.
It is noteworthy that the U.S. leads in cruise revenue, surpassing Germany by fivefold. The industry’s growth is attributed to the rising appeal of cruise vacations, driven by cost differentials, amenities, and environmental conservation efforts.
Furthermore, increased consumer demand for diverse cruise experiences and advancements in ship design and technology contribute to the industry's expansion. The global cruise market is expected to grow at a CAGR of 11.5% from 2023 to 2030.
Considering these trends, let’s take a look at the fundamentals of the two Travel - Cruises stocks for making smart investment decisions.
Stock to Hold:
Royal Caribbean Group (RCL)
RCL operates as a cruise company worldwide. The company operates cruises under the Royal Caribbean International, Celebrity Cruises, and Silversea Cruises brands, which comprise a range of itineraries.
On December 5, 2023, RCL announced the debut of its newest Icon Class ship, Star of the Seas, scheduled for August 2025 in Port Canaveral (Orlando), Florida. The ship offers a comprehensive vacation with eight themed areas, including attractions like Category 6 waterpark and Crown's Edge skywalk, providing diverse pools, dining, and entertainment options for a personalized and memorable experience.
In terms of the trailing-12-month EBITDA margin, RCL’s 28.53% is 161.5% higher than the 10.91% industry average. Its 17.72% trailing-12-month EBIT margin is 135.8% higher than the 7.52% industry average. However, the stock’s 0.40x trailing-12-month asset turnover ratio is 60% lower than the 0.99x industry average.
For the third quarter that ended on September 30, 2023, RCL’s total revenues increased 39% year-over-year to $4.16 billion, while its operating income grew 323.9% year-over-year to $1.27 billion.
For the same quarter, its adjusted net income and EPS increased significantly year-over-year to $1.07 billion and $3.85, respectively. In addition, the company reported adjusted EBITDA of $1.73 billion, up 132.8% over the prior-year quarter.
Street expects RCL’s revenue for the quarter ending December 31, 2023, to increase 28.7% to $3.35 billion. Its EPS for the June 2024 quarter is expected to increase 29.1% year-over-year to $2.35. It surpassed the Street EPS estimates in all of the trailing four quarters. Over the past month, the stock has gained 23% to close the last trading session at $129.97.
RCL’s POWR Ratings reflect an uncertain outlook. It has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked first out of 4 stocks in the Travel - Cruises industry. It has a C grade for Value, Momentum, Sentiment, and Quality. Click here to see RCL’s Growth and Stability ratings.
Stock to Sell:
Norwegian Cruise Line Holdings Ltd. (NCLH)
NCLH and its subsidiaries operate as a cruise company in North America, Europe, the Asia-Pacific, and internationally. The company manages the Norwegian Cruise Line, Oceania Cruises, and Regent Seven Seas Cruises brands.
In terms of the trailing-12-month asset turnover ratio, NCLH’s 0.42x is 57.4% lower than the 0.99x industry average. Its 33.61% trailing-12-month gross profit margin is 5.3% lower than the 35.47% industry average. Likewise, the stock’s 6.50% trailing-12-month EBIT margin is 13.5% lower than the 7.52% industry average.
NCLH’s revenues for the fiscal third quarter ended September 30, 2023, came in at $2.54 billion. The company’s adjusted net income and adjusted EPS came in at $387.95 million and $0.76, respectively. In addition, its cash and cash equivalents came in at $681.56 million, compared to $946.99 million as of December 31, 2022.
For the quarter ending December 31, 2023, NCLH’s EPS is expected to remain negative. Over the past six months, the stock has declined 3% to close the last trading session at $20.47.
NCLH’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to a Sell in our proprietary rating system.
It has an F grade for Stability and a B for Sentiment and Quality. It is ranked last in the same industry. In total, we rate NCLH on eight different levels. Beyond what we stated above, we also have given NCLH grades for Growth, Value, and Momentum. Get all the NCLH’s ratings here.
What To Do Next?
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RCL shares were trading at $130.50 per share on Friday morning, up $0.53 (+0.41%). Year-to-date, RCL has gained 164.01%, versus a 26.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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