Cruise lines navigate from worst to first in 2023 surge

Key Points

• Royal Caribbean, Carnival and Norwegian are among 2023’s top 10 S&P 500 gainers, and also lead the consumer discretionary sector.
• Pent-up demand for cruising is contributing to the industry's resurgence, as are improved profit margins, efficiencies and customer experience.
• The Cruise Lines International Association forecasts 36 million passengers in 2024, up from 31.5 million in 2023.

Perhaps no other industry better exemplifies the “worst to first” phenomenon than cruise lines.

Royal Caribbean Cruises Ltd. NYSE: RCL and Carnival Corp. & plc NYSE: CCL are among 2023’s top 10 best gainers in the S&P 500, while Norwegian Cruise Line Holdings Ltd. NYSE: NCLH is in the top 30.

Worst to first refers to a turnaround scenario where underperforming entities or assets transform into top performers. 

Several factors are behind these companies’ stellar year.

As the industry continues to bounce back from some of the most draconian pandemic-era closures, cruise line customers are finding that prices are often more affordable than a typical resort vacation. That, along with pent-up demand for cruising, is driving business. 

Upgrading the customer experience

Some of the bigger cruise lines have been expanding their fleet and upgrading existing ships with more upscale accommodations and improved dining, recreation and entertainment offerings. 

According to industry trade group The Cruise Lines International Association, more customers will be getting on board in 2024. The group is forecasting 36 million ocean-going cruise passengers in 2024, up from 31.5 million in 2023. 

Among its members, the group projects the fleet of ocean-going cruise ships to exceed 300 vessels for the first time in 2024. It expects its members to launch 12 new ships in 2024. 

In addition, the companies have been reinventing themselves as leaner, more efficient versions of their pre-Covid structures. The complete shutdown of their operations forced them to shed costs, and they haven’t simply returned to their previous spending levels. Instead, the companies have a renewed focus on profit margins.

Biggest passenger ship setting sail

One example of this new focus is Royal Caribbean’s Icon of the Seas, the world’s biggest passenger vessel, designed with operational efficiencies, as well as improved customer experience, in mind. 

Royal Caribbean revenue has been surging at double- and triple-digit rates in the past eight quarters, while the company is expected to report 2023 earnings of $6.60 a share, the first profit since 2019. 

You can see the year-over-year growth trajectory using the Royal Caribbean earnings data. The Royal Caribbean analyst forecasts show a consensus view of “moderate buy.” 

The stock is up 22.07% in the past month, 41.28% in the past three months and 162.84% year-to-date.

Fun at an affordable price

Carnival Cruise Lines’ value proposition is fun at an affordable price. The company has returned 27.61% in the past month, 29.29% in the past three months and 131.64% year-to-date. 

Analysts expect huge earnings growth in 2024, with net income rising by 9,618% to 97 cents a share. In 2025, that’s expected to grow by another 38% to $1.34 a share. 

The Carnival Cruise Lines chart shows the stock is currently in a buy zone, trading 5.7% below its December 22 high of $19.74. There’s some risk at this juncture, as you don’t want to chase a stock lower than about 7% from its prior high. However, it’s finding support at its 10-day moving average, indicating that there’s likely just a touch of profit-taking after a run-up that began in late October.

The Norwegian Cruise Lines chart shows a similar pattern, with the stock selling off lightly and getting moving average support. However, Norwegian appears to be forming a handle with a buy point above $21.26. 

Norwegian's pivot back to profitability

Analysts expect Norwegian to return to profitability in 2023 for the first time since 2019, with earnings growing by 63% to $1.24 a share in 2024.

Royal Caribbean, Carnival Cruise Lines and Norwegian are tracked in the Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY. In the past month, Norwegian is the biggest gainer among consumer discretionary stocks, with Carnival third and Royal Caribbean sailing into fifth place. 

For 2023, Royal Caribbean and Carnival are the top 2 best performers in the consumer discretionary sector, while Norwegian Cruise Lines is the ninth best.