The cruise industry has been through a rollercoaster of changes in recent years, with the COVID-19 pandemic drastically altering the landscape. Once a booming sector, cruise lines faced unprecedented challenges as global travel ground to a halt, leading to massive financial losses, layoffs and operational overhauls.
As the world gradually emerged from the pandemic, some companies managed to recover impressively, capitalizing on pent-up demand and evolving consumer preferences. Yet, not all have been as fortunate; certain players in the industry are still grappling with the long-term impacts of the pandemic, struggling to regain their pre-pandemic momentum. Given these dynamics, cruise stocks have become particularly interesting.
In this article, we will explore three cruise stocks that have caught our attention, especially after last week’s dip. I believe these names present potential buying opportunities for investors seeking exposure to this volatile yet fruitful industry.
Royal Caribbean Cruises (RCL)
Of all cruise stocks, Royal Caribbean Cruises (NYSE:RCL) has emerged as the leading performer in the post-COVID era. Over the past year, its shares have skyrocketed nearly 50%, reflecting a solid rebound in market demand in key regions like the Caribbean and Europe. This momentum was clearly reflected in the company’s impressive Q2 results.
Specifically, Royal Caribbean achieved a record second-quarter result, with sales soaring by 16.7% to $4.11 billion. This was driven by excellent load factors of 108.2% and a 10% increase in rates from both new and existing ships. Further, the increased top line led to a margin expansion, boosting adjusted earnings per share (EPS) to $3.21. This marked a huge increase of 76% and beat Wall Street’s expectations by a wide margin of $0.46.
Considering these impressive results, the company has reinstated its dividend, which had been suspended amid the pandemic, signaling renewed confidence in its future prospects. Also, despite the stock’s remarkable rally over the past year, I believe it remains cheaply valued with a P/E ratio of just 13.4 based on this year’s anticipated EPS. In fact, based on management’s guidance, EPS is expected to land between $11.35 and $11.45. The midpoint of this range implies a 68% year-over-year growth and is set to mark a new record for the company.
Carnival (CCL)
Unlike Royal Caribbean, shares of Carnival (NYSE:CCL) have yet to recover meaningfully in the post-COVID era. Not only has the stock underperformed the market recently, dropping 20% over the past month, but it also remains about 80% lower than its pre-COVID highs. This lag is primarily due to its high indebtedness, which has continued to pressure the company’s profitability even as revenues began to recover.
To elaborate, in its Q2 results, Carnival reported a 17.7% increase in revenue, reaching $5.78 billion, and a 76% rise in adjusted EBITDA, totaling $1.20 billion. Despite these notable improvements, substantial interest expenses due to the company’s hefty debt position of $30.65 billion significantly impacted the bottom line. Thus, adjusted net income came in at just $134 million, or $0.11 per share.
Still, I remain optimistic about Carnival’s investment case, as ongoing deleveraging efforts should improve net margins and allow net income to snowball in the coming years. Wall Street anticipates that adjusted EPS will grow at a compound annual growth rate (CAGR) of 12% over the medium term. With shares currently trading at a relatively low P/E ratio of 12 times this year’s expected EPS, Carnival could present notable upside potential from its current levels based on this estimate, offering a compelling opportunity for investors.
Norwegian Cruise Line (NCLH)
Like Carnival, Norwegian Cruise Line (NYSE:NCLH) has underperformed lately, with shares down 22% over the past month and still approximately 75% below their pre-COVID 2019 levels. This continued struggle can again be mainly attributed to high indebtedness. The company carries a total debt of $14.1 billion, leading to substantial interest expenses in the current rate environment, which pressures its profitability.
In particular, in its recent Q2 earnings report, Norwegian Cruise Line posted a nearly 8% increase in revenue, hitting $2.4 billion, and a 14% rise in adjusted EBITDA to $587.7 million. Yet, elevated interest expenses of $178.5 million limited adjusted net income to $203.7 million, or $0.40 per share.
That said, this result represents a notable improvement from last year’s $137.0 million and $0.30 per share. Further, ongoing deleveraging efforts are expected to gradually improve profitability. Wall Street projects that EPS will grow at a CAGR of 16% over the medium term. With shares trading at about 9.8 times this year’s expected EPS, Norwegian Cruise Line’s investment case mirrors that of Carnival and likely presents a compelling buying opportunity at the stock’s current price levels.
On the date of publication, Nikolaos Sismanis did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.