You have 2 free articles remaining. Subscribe
Feb 1, 2018

Buy Cruise Stocks If You Can Handle Rough Seas Retiring Baby Boomers, Chinese Vacationers Helping Industry Grow

by Richard Morrison

Every winter my cousin Karen and her husband Ken take a cruise around the Caribbean on a huge ship that is essentially an opulent floating city.

“When we leave for our cruises we’re always pale and stressed out from work,” Karen said. “When we come back we’re tanned and relaxed, but we’re ten pounds fatter and our credit card bill is huge. Even so, it’s worth every penny.”

With a dozen or so winter cruises under their belts, Karen and Ken have recognized there is no point in trying to live frugally on a cruise ship. Their credit card statement always swells with bills from shipboard bars, restaurants, salon and spa treatments, wine tastings, Pilates lessons and cooking classes, plus fees for Internet access and shore excursions, not to mention the money lost in the casino.

“The whole experience of the vacation makes it worth the money, though,” Karen said. Since the money is flowing and the ships are full, she wondered if cruise ship lines are good investments. In my view, cruise line stocks are indeed solid choices for investors who are looking for long-term growth and can stand a little volatility.

Demand for cruising is increasing, says the Cruise Line International Association (CLIA), which represents more than 50 cruise lines that collectively account for more than 95% of global cruise capacity. The CLIA’s figures show the number of passengers carried on cruise ships has increased steadily over the past eight years. In 2018, CRIA says 27.2 million passengers are expected to take cruises, up from 25.8 million in 2017, 24.7 million in 2016 and 23.06 million in 2015. Similarly, 80% of travel agents certified by the CLIA say they are expecting an increase in sales in 2018.

Baby Boomers are reaching retirement age, which means greater demand for vacations. At the same time cruise tourism in Asia is growing at an impressive rate, with China as the main driver as more Chinese join the middle class. A CLIA analysis on Asian cruise trends showed that between 2012 and 2017, the absolute volume of cruise travelers from Asia has quadrupled, with much of the gain coming from Chinese passengers.

Investors who want to capitalize on the trend have three publicly traded cruise stocks from which to choose. Carnival Corp. (CCL/NYSE) with a market capitalization (shares times share price) of US$47.5 billion, Royal Caribbean Cruises Ltd. (RCL/NYSE) with a market cap of US$25.5 billion and Norwegian Cruise Line Holdings Ltd. (NCLH/NYSE), with a market cap of US$12.2 billion. Investors cannot participate directly in Disney Cruise Line, as the cruise line segment is included in Disney’s parks and resorts segment.

Over the long-term, Carnival, Royal Caribbean and Norwegian have all outperformed the S&P 500. Shares of Royal Caribbean have been the biggest gainer, rising fourfold to about US$120 from US$30 over the past five years, while shares of Norwegian Cruise Line and Carnival Corp. have doubled over the same period. There have been some rough seas along the way, however. In the five weeks between late December 2015 and the end of January 2016, for example, both Norwegian and Royal Caribbean’s share prices fell 30%, while Carnival investors lost 22%.

Carnival Corp. (CCL/NYSE)

Carnival is the world’s largest cruise line company, with 102 ships and 19 more coming over the next few years. Carnival’s brands include Carnival Cruise Line, Fathom, Holland America Line, Princess Cruises and Seabourn in North America; Cunard and P&O Cruises in England; AIDA Cruises in Germany; Costa Cruises in Italy and P&O in Australia. Combined, the brands employ about 120,000 people. On any day, more than 325,000 passengers are on its ships, totaling about 85 million passenger cruise days a year, the company’s website says.

Founder Ted Arison started the company in 1972 with a single second-hand ship, Canadian Pacific’s 11-year-old Empress of Canada, and renamed it the TSS Mardi Gras. Touted as a “fun ship,” on her maiden voyage from Miami to San Juan, the Mardi Gras ran aground on a sandbar, although she was refloated and served the company until 1993. It’s been full steam ahead for Carnival since then.

In 2017 Carnival reported record full-year revenues of US$17.5 billion, up $1.1 billion over the previous year. Net income was US$2.6 billion or US$3.59 per share, down from US$2.8 billion or US$3.72 per share, hurt by higher fuel costs and less favourable currency exchange rates.

Next year, full-year adjusted earnings per share should be in the range of US$4 to US$4.30.

Carnival’s shares are the least volatile of the three, making them best suited for those who don’t like choppy seas. Carnival shares traded at about US$45 in September 2016, then climbed steadily to reach the US$65 level last summer and have remained in the US$65 range since then. At a recent price of US$67, the shares trade at about 16 times next year’s projected earnings. The dividend of US$1.80 yields about 2.7%.

Norwegian Cruise Lines Holdings Ltd. (NCLH/NYSE)

Norwegian Cruise Line Holdings Ltd. operates the Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. Norwegian has 25 ships, but will add seven more by 2025, and two more in 2026 and 2027. The company is best known for its Freestyle Cruising concept, which means that there are no fixed times or pre-arranged seating arrangements for meals, nor is formal attire required.

Carnival founder Ted Arison joined Norwegian shipping magnate Knut Kloster to set up Norwegian in 1966, using the car ferry Sunward to carry cars between Southampton England and Gibraltar. After Mr. Arison left to start Carnival, Mr. Kloster remained at Norwegian, bought a second car ferry, the Starward, and began offering combined flights with Caribbean cruises. In 1979 Norwegian bought the famous liner France, at the time the world’s largest passenger ship, poured US$100-million into it and renamed it Norway. The first giant cruise liner was popular with vacationers and prompted competitors to offer big ships of their own.

Norwegian went public on January 1, 2013 at US$25. The stock doubled between October 2014 and October 2015, slumped for a year, then climbed slowly between September 2016 and 2017. At a current price of US$53.25, NCLH trades at about 17 times earnings and about 2.2 times book value per share. The company pays no dividend.

Norwegian’s revenue and earnings have been climbing steadily since 2010. In 2016, Norwegian earned US$633 million (US$2.78 per share) on revenue of US$4.87 billion, up from profit of US$427 million (US$1.26) on revenue of US$4.34 billion in 2015. The company’s operating margin and return on capital have also grown steadily since 2012.

Norwegian said it expects 2017 full-year adjusted earnings per share to come in at about $3.90 per share. Excluding the impact from weather disruptions along with a technical issue on one of its ships, the company’s earnings projection would likely be $4.05 per share, Norwegian said.

At a current share price of US$54.25, Norwegian is trading at about 13.9 times the company’s projected earnings per share.

Royal Caribbean Cruises Ltd. (RCL/NYSE)

Royal Caribbean owns and operates three global brands: Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises. Royal has a 50% joint venture owner of the German brand TUI Cruises, a 49% shareholder in the Spanish brand Pullmantur and a minority shareholder in the Chinese brand SkySea Cruises. Together, these brands operate a combined total of 49 ships with an additional twelve on order as of September 30, 2017.

Under Royal Caribbean’s double-double program, launched in 2015, the company said it would try to grow its revenue, increase capacity and control costs to the point where earnings per share for 2017 would be double that of 2014, and return on invested capital (ROIC) would hit double digits. It is nearly there. Royal Caribbean said it is expecting adjusted EPS of $6.78 in 2017, which means at a recent price of US$120, RCI shares trade at 17.7 times earnings.

“The company is experiencing strong early booking trends for 2018,” the company says on its website. “While still early in the booking cycle, the view for 2018 is encouraging and the company expects another year of solid yield and earnings growth.”

Conclusion

Cruise line stocks are not for retirees seeking income, nor are they for short-term momentum investors who hope to buy high and sell higher. And their share prices reflect too much optimism to have appeal to bargain-hunting value investors. Buy Carnival if you are looking for low volatility and a high dividend, buy Royal Caribbean if you are a momentum investor interested in riding excellent share price gains over the past few years. If you want to capitalize on across-the-board growth in the industry, take a stake in all three.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca