Best Stock to Buy Right Now: Carnival Corporation vs. Norwegian Cruise Line

Whenever a stock declines due to circumstances largely outside of a company’s control, such as a global pandemic, it’s worth examining whether it could be a potential recovery candidate. Cruise stocks were among the hardest hit, with voyages halted and companies taking on significant debt to stay afloat.

Now that business is back to normal, let’s meet two prominent players in the industry, Carnival Corporation & plc (CCL -0.24%) and Norwegian Cruise Line (NCLH 0.22%)which are down about 60% from pre-pandemic highs to see which stock has the best chance of recovery.

Cruise revenue is back, but profits are lagging behind

Before examining each company’s revenue and net income, it’s worth noting that Carnival is a much larger cruise operator than Norwegian, with a market cap of $21.7 billion compared to Norwegian’s $7.9 billion of Norwegian dollars.

In Carnival’s last 12 months, the company generated $23.4 billion in revenue, representing a 14 percent increase over the same period five years earlier. CEO Jeff Weinstein argues that the renewed demand is no fluke, saying on the company’s most recent earnings call: “This is not pent-up demand, it’s the combined effect of increased awareness of our cruise brands throughout time and our improvement. yield management techniques to translate demand into higher ticket price.”

Similarly, Norwegian set sales records for the past 12 months with $9.1 billion, which equates to a 43% improvement over the same 12-month period five years earlier. Norwegian CEO Harry Sommer echoed Weinstein’s sentiment about consumer demand in his latest earnings call, specifically noting that “strong demand” for cruises led to record results and record advanced ticket sales.

On the bottom line, both companies’ profitability has become sustainable again after bottoming out in 2021.

Over the trailing 12 months for each company, Carnival generated $904 million in net income, compared to Norwegian’s $420 million. Given that Carnival’s revenue is more than double that of Norway, it makes sense that Carnival is more profitable. However, Norway has a better operating margin — the percentage of revenue a company keeps after accounting for cost of goods sold and operating expenses — at 13.3 percent, compared to Carnival’s 12.1 percent. Notably, both companies’ operating margins are still down more than 25% from pre-pandemic levels.

CCL Revenue (TTM) data by YCharts

Getting out of the strait

The cruise industry naturally takes on debt due to the high cost of ships, but the pandemic has exacerbated that debt.

Before 2020, Carnival had about $11 billion in net debt, which has steadily risen to a peak of $30.5 billion at the end of fiscal 2022. The good news is that the company has been able to pay down its debt — albeit slowly – – to $27.7 billion in its most recent earnings report.

The bad news is that Carnival has paid $1.4 billion in interest expenses over the past 12 months, and its debt is not “investment grade,” meaning any subsequent debt or refinancing could result in rates and costs higher maintenance. Carnival management is taking proactive steps to secure its balance sheet, such as paying off higher-interest debt early to reduce interest expenses.

By comparison, Norway’s cash position has followed a similar trajectory, with net debt of $6.6 billion before 2020, almost doubling to $12.8 billion as of Q2 2024. Norway’s net debt has declined just 6 percent to Carnival’s 9.3 percent, but the company shed its highest-interest debt in March and received an upgrade to its debt rating. Similarly to Carnival, Norwegian debt is still considered non-investment grade. Over the past 12 months, Norweigan paid $775.2 million in interest expenses, 63% lower than the peak, while Carnival’s interest expenses remain largely unchanged despite its net debt improvement.

CCL Net Total Long Term Dab data (quarterly) by YCharts

Is Carnival Cruise Line or Norwegian Cruise Line the better stocks to buy?

These two companies, which face similar challenges, will need to continue prioritizing debt to stabilize their balance sheets before stocks can reach pre-pandemic levels. While it may take time, each has shown promise for a possible recovery thanks to record revenues and reaching profitability again. But if you were to pick just one stock to buy, it’s important to consider the valuation.

Using the forward price-earnings (P/E) ratio, which compares a stock’s price to its expected earnings over the next 12 months, investors can compare each stock’s valuation against each other to determine which one offers a better buying opportunity.

Notably, Carnival and Norwegian recently revised their net income forecasts upward, meaning both management teams expect a better earnings outlook than previous guidance. As a result, Carnival and Norwegian trade at 14 and 11.6 times forward earnings, respectively. Not only is Norwegian’s forward P/E ratio cheaper than Carnival’s, it’s also 42.2% lower than a year ago. Comparatively, Carnival’s forward P/E ratio is 9.1% higher than a year ago.

While cruise operators may not be a compelling choice for debt-weary investors, industry change is afoot. Norway appears to be the better choice for investors looking to take on a huge risk, as it has a cheaper valuation and more manageable debt than Carnival.