Carnival, Norwegian or Royal Caribbean: Which cruise stock is the best buy today?

The cruise industry has undoubtedly been the hardest hit during the pandemic. Forced to remain in port for months after almost all other businesses were allowed to reopen, cruise operators have had to take on enormous amounts of debt to survive.

Fortunately, pent-up demand for travel and tourism helped save the industry. Strong bookings led to growth in revenue, profits and margins. Now that cruise lines are sailing the high seas again, although share prices are still below pre-pandemic highs, let’s see which of the biggest cruise operators is the best buy.

Key points about this article:

• The cruise ship industry took a long time to shake off the impact of the forced lockdown of the pandemic, but it is sailing the high seas again.
• There are high barriers to entry in the industry, limiting competition, allowing investors to focus on which of the three cruise stocks they should buy.
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Carnival (CCL)

Carnival Ecstasy cruise ship

The largest cruise ship operator is Carnival (NYSE:CCL). At the end of fiscal 2023, it had 92 ships under nine different brands, including its namesake cruise line, Princess Cruises, Holland America, Aida Cruises and Costa Cruises. Of the industry’s more than 701,000 global passenger capacity, Carnival’s the capacity was 263,300or almost 38% of the total. Since last December, Carnival has acquired four more ships that have added an additional capacity of nearly 17,000 passengers.

Business is booming. Passenger Cruise Days (PCD) increased by 14%. 47.8 million in the first six months from the current year, helping to increase revenue by 20% to $11.2 billion. Carnival generated operating income of $806 million, a significant turnaround from the $52 million loss it suffered last year. Second-quarter revenue of $5.8 billion was a record for the cruise ship operator.

However, Carnival is still weighed down by its massive debt. While it paid out more than $1.3 billion in the past year, it still has more than $27.1 billion of long-term debt on its balance sheet versus $1.6 billion in cash and equivalents. However, it ended the quarter with $4.6 billion in available cash.

Over the past two years, CCL stock is up 59% compared to a 35% gain by the S&P 500. Trading at 10 times earnings estimates, a fraction of sales and 12 times free cash flow, Carnival looks like a stock to buy these levels at.

Norwegian Cruise Line Holdings (NCLH)

Norwegian Cruise Line’s Pride of America cruise ship

At the other end of the spectrum is the smallest cruise operator, Norwegian Cruise Line Holdings (NYSE:NCLH), with 32 ships and three brands: the Norwegian name, Oceania Cruises and Regent Seven Seas Cruises. His business has also rebounded and is expected to add 13 more ships in its fleet over the next decade or so.

Annual revenue of $4.5 billion rose 13 percent from last year, helping it post an operating profit of $181 million, compared with losses of $73 million a year earlier. Its PCDs rose 8% year-on-year to 12.2 million for the first two quarters of 2024.

Like Carnival, it had to take on a lot of debt and at the end of the second quarter had $11.9 billion in long-term debt. That’s a substantial amount, considering it has a third of the ships that Carnival does, but 44% of the debt. It helps explain why Norwegian Cruise Line is the worst performing cruise operator. Its shares have risen 27% over the past two years, lagging the benchmark.

While NCLH trades at substantial discounts to the market and its peers, it has burned cash with negative free cash flow of $428 million over the past 12 months. It could be big trouble ahead for Norwegian Cruise Line.

Royal Caribbean Cruises (RCL)

Royal Caribbean’s Quantum of the Sea at night

The second largest cruise operator with 68 ships across five brands is Royal Caribbean Cruises (NYSE:RCL). The mid-level cruise ship stock was by far the best performing of the three. While both Carnival and Norwegian take to the water this year with their stocks down 15%, Royal Caribbean is riding the wave 20%.

Over the past two years, its stock has risen 274%. Over the past five years, when its rivals have lost two-thirds of their value, RCL shares have risen 44%. That’s still behind the S&P 500’s 81% gain, but it’s by far the best in the industry.

Because it is also the parent of Celebrity Cruises and Silversea Cruises, Royal Caribbean has a reputation for focusing on the experience. Its ships often offer innovative amenities such as surf simulators, climbing walls and various dining experiences that enhance the overall guest experience. It is undoubtedly also considered a more luxurious cruise operator than the larger Carnival.

Of course, it also depends on the length of the cruise. A two- or three-day cruise can have a more party atmosphere than an extended-stay cruise, which will usually have more families regardless of the ship you’re on.

Still, revenue rose 22 percent this year to $7.8 billion operating income increased by 77% to 1.8 billion dollars. Royal Caribbean was the only one of the three to also report profits last year, or $1 billion.

However, given that RCL stock has climbed so quickly so far, have you missed out? Wall Street still expects Royal Caribbean to grow revenue at a compound annual growth rate of 30% over the next five years. With the stock trading at a discount to earnings and growth, RCL stock looks like the best cruise ship stock to buy.

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