Better Stocks to Buy Right Now: Carnival Vs. Royal Caribbean Cruises

The cruise ship industry has had a miraculous turnaround following the COVID-19 pandemic. After grinding to a halt and losing a lot of money for several quarters, demand for cruise ships exploded as tourists took to the high seas in these vast floating hotels. Two publicly traded cruise ship stocks are Royal Caribbean (RCL 0.20%) and Carnival (CCL -0.06%). Since the start of 2021, both companies have seen revenue explode higher. In fact, Royal Caribbean shares are now up 100% over the past 12 months.

Which is the best buy now: Royal Caribbean or Carnival? It’s time to pit these two cruise lines against each other and see which — if either — is a good buy for today’s investors.

Carnival: Most passengers carried

The largest cruise ship company in the world by passengers carried is Carnival. The owner of its namesake brand as well as Holland and Princess cruise lines, the company carried 3.9 million passengers last quarter, up from 3.6 million a year earlier.

Revenues for the last 12 months were $24.5 billion. Coming out of the pandemic, Carnival has flexed its profit muscles, generating a 14% operating margin over the past 12 months. That equates to $3.4 billion in earnings for the company over the past year.

For the rest of this decade, analysts expect cruise industry revenue to grow by about 5% per year. If Carnival can maintain its market share, this sector will lead to increased sales and hopefully expanded profit margins. In turn, this will lead to greater growth in earnings for shareholders. Today, you can buy Carnival stock at a price-to-earnings (P/E) ratio of 16, which is well below the S&P 500 average index of 30.

Royal Caribbean: The best profit margins

The second largest player in cruises is Royal Caribbean, which offers customers a more premium experience. In the quarter ending in June, just over 2 million passengers were carried on its vessels. In the last 12 months, revenues amounted to $15.3 billion, a significant increase from revenues during the COVID-19 pandemic crisis.

Royal Caribbean generates less revenue than Carnival, but actually has significantly higher profit margins (24% operating margins over the last 12 months). These high profit margins mean that Royal Caribbean generates $3.68 billion in annual operating earnings. This is more than Carnival in the last 12 months.

In fact, Royal Caribbean has roughly double Carnival’s market capitalization, sitting at $46 billion at the time of writing. Its shares have outperformed Carnival over the past year, generating strong returns of 106% to Carnival’s 41.5%, thanks to better P&L management.

Still, the stock has a higher P/E than Carnival at 19.6. Investors should consider this before loading up on stocks.

CCL Free Cash Flow Data by YCharts

The case for neither

At first glance, both Royal Caribbean and Carnival Corp seem like attractive stocks. Both benefit from long-term tailwinds in the sector, are major players in the cruise industry and have solid profit margins. But we forget two things about these businesses: cash flow and debt. Both are a huge negative for these cruise ship operators.

First, both companies generate inconsistent cash flow because of the huge capital expenditures required to run a cruise ship business. These are large ships; they are not cheap to build and operate. In fact, Royal Caribbean’s free cash flow has been negative for the past 12 months. Carnival’s was positive at $1.23 billion, but still well below reported operating income.

A headwind to cash flow is the huge debt both companies have on their respective balance sheets. Royal Caribbean has more than $20 billion in debt and almost zero cash. Carnival has nearly $30 billion in debt and $1.5 billion in cash. Historically, these cruise ship operators have struggled to generate healthy cash flows, and it’s hard to see how they will pay off those debts unless the business model changes.

With that in mind, none of these stocks are a buy. Just don’t buy stocks that have debt bombs on their balance sheets waiting to go off. Smart investors don’t do that. If consumer spending heads south, there could be a lot of downside for these stocks. Look at what happened in 2020.