Cruise Lines See Smoother Seas On Horizon As Profitablity Returns

Key Points

• Three publicly traded cruise lines, Carnival, Royal Caribbean and Norwegian are showing clear signs of revival, and may be entering an era of strong growth.
• Carnival's CEO said the 2023 "wave season" marked the highest number of bookings in the company's history. 
• Royal Caribbean and Norwegian are also seeing robust revenue growth.
• All three companies have been narrowing losses and expect a return to profitability either this year or next.

If you look out over the horizon, you may just spot the cruise line industry floating along on a life raft, after taking on water and gradually sinking in recent years. 

Cruise-line stocks, Carnival Corporation & plc NYSE: CCL, Royal Caribbean Group NYSE: RCL and Norwegian Cruise Holdings Ltd. NYSE: NCLH are showing better price action as .profitability as back on deck.

The cruise business suffered more than the restaurant industry, due to government-imposed pandemic restrictions. Restaurants had the option of takeout and delivery services, and some laws even changed to allow carry-out cocktails. Cruise lines had no such lifeline.

Nonetheless, the three largest publicly traded cruise lines are showing clear signs of revival, and may be entering an era of strong growth. Here’s a look at their current performance and future prospects.

Carnival 

At a recent financial conference, new Carnival CEO Josh Weinstein said the 2023 “wave season,” or the timeframe between January and March when most cruise reservations happen, marked the highest number of bookings in the company’s history. 

In addition to record bookings, Weinstein said onboard spending is higher than ever. 

“Between the future bookings and the real-time impact of onboard spending, we just see no slowdown,” he said. 

Carnival shares are up 9.46% in the past month, and 32.13% year-to-date. While the company is still working its way back to profitability, losses have narrowed since 2020, as Carnival earnings data show. Wall Street expects the company to become profitable again next year, earning $0.79 a share. 

Carnival analyst ratings show a consensus of “hold,” with a price target of $11.45, an upside of 10.49%.

Although the company has a heavier debt load than pre-Covid, Weinstein recently said the company has no plans to issue more shares as a way of raising money to pay down debt. That’s reassurance to institutional investors who don’t want to see their ownership percentage diluted.

If the strong revenue growth continues, free cash flow could be used to pay down some of the company’s debt, which could boost future performance of Carnival stock. 

Royal Caribbean

Carnival isn’t the only cruise operator seeing increases in bookings as well as onboard spending. 

In the company’s first-quarter earnings report, on May 4, CEO Jason Liberty said, in a statement, “We knew that demand for our business was strong and strengthening, but we have been pleasantly surprised with how swiftly demand further accelerated well above historical trends and at higher rates." 

Revenue grew 172% over the year-earlier quarter, which was already showing robust post-Covid strength. Royal Caribbean lost $0.23 a share, much narrower than the $4.57 a share loss a year ago. 

Royal Caribbean earnings data reveal that the company exceeded revenue and earnings views in the quarter. 

In February, Bank of America upgraded Royal Caribbean to neutral from underperform, citing the company’s robust pricing, relative to competitors. B of A also based its upgrade on Royal Caribbean’s attention to balance sheet risk.

Earlier this year, Royal Caribbean said it was focused on measures including lowering interest-rate expenses and reducing leverage. The company extended unsecured credit facilities with key lenders “to ensure adequate liquidity on a going-forward basis.” The company believes those moves will boost its return on invested capital. 

Royal Caribbean stock is up 25.59% in the past month, 4.66% in the past three months and 55.69% year-to-date.

Norwegian Cruise Lines

Wall Street expects the mid-cap cruise liner to sail out of 2023 with earnings of $0.76 a share. As with industry rivals, there’s been no profit since 2019. 

As they fight their way back to growth, cruise lines are facing the same challenges as other industries. High costs of goods and energy could be challenges. 

However, in the company’s first-quarter earnings release on May 1, it noted higher pricing, in addition to increased capacity and cumulative bookings ahead of 2019 levels. 

Norwegian Cruise Line earnings data show the company easily beating top- and bottom-line views in the most recent quarter. Revenue has been growing at triple-digit rates since the quarter ending in September 2021. 

Following the first-quarter report, Stifel Nicolaus boosted its price target to $22 from $21. Norwegian Cruise Line analyst ratings show a consensus of “hold,” with a price target of $16.50, an upside of 18.36%.

But that consensus target may not really be the one investors should be watching: Since November, the stock twice hit resistance between $18 and $19. Norwegian Cruise Line stock is currently forming a consolidation below a February high of $18.12. Watch for the stock to clear overhead resistance above $18.67, and ideally to crest a wave closer to $19 as a good indicator of future momentum.