Stock Analysis & Ideas

RCL vs. CCL: Which Cruise Line Stock Should You Ride?

Story Highlights

Cruise line stocks were hit particularly hard by the pandemic, but some signs of recovery are appearing on the horizon. However, the companies in this sector probably won’t all recover at the same pace, so one of these names looks better positioned than the other.

In this piece, I evaluated two cruise line stocks, Royal Caribbean Cruises (NYSE:RCL) and Carnival Corp (NYSE:CCL), to determine which is better. On the one hand, the industry sold off heavily during the pandemic amid the widespread shutdowns and fears of being stuck out at sea on a ship where COVID has broken out.

On the other hand, both companies took on massive amounts of debt as they attempted to stay afloat. As a result, Royal Caribbean and Carnival are both polarizing stocks, but RCL looks like a better bet.

In its fourth-quarter letter to investors, Performing Capital outlined the bull thesis for cruise line stocks, which is that the cruise industry is about to come roaring back. However, while the hedge fund appears equally bullish on Royal Caribbean and Carnival, investors might want to look at each stock individually, as one appears better-positioned than the other.

Royal Caribbean Cruises (NYSE:RCL)

Royal Caribbean Cruises shares are already up close to 50% year-to-date, which may cause some investors to wonder if there’s any upside left. However, the company’s valuation, a deep dive into its fundamentals, and a review of the sector-wide macro trends suggest a bullish view could be appropriate for now.

First, Royal Caribbean is trading at a price-to-sales (P/S) ratio of around 2.1 times, slightly below where it stood leading up to the pandemic. For comparison, the three-year average P/S ratio for the hotels, resorts, and cruise lines industry is 7.0 times, significantly higher than the current ratio of four times.

Despite their 50% year-to-date gain, Royal Caribbean shares remain 10.6% lower for the last 12 months, keeping them around $71/share — significantly below the $100 to $130 range they were trading at before the pandemic. There appears to remain pent-up demand for travel after the pandemic, and Performing Capital’s point about the cruise industry offering the best value for the money appears correct.

On Royal Caribbean’s third-quarter earnings call, CEO Jason Liberty said land-based vacations cost about 40% more than cruises. With inflation remaining so high, travelers are undoubtedly seeking cheaper trips. Additionally, Royal Caribbean was profitable for the September quarter, although it did report a fourth-quarter loss that beat management’s guidance.

The company has had its full fleet back in operation since June, so it should be well on its way back to profitability. In its fourth-quarter earnings report, it stated that its seven-biggest booking weeks ever occurred since its November 2022 earnings call.

Of course, Royal Caribbean remains heavily indebted due to the pandemic, so this stock is clearly risky, but its net margin recovered dramatically in 2022, jumping from -343.3% in 2021 to -24.4% in 2022.

What is the Price Target for RCL Stock? 

Royal Caribbean has a Moderate Buy consensus rating based on seven Buys, four Holds, and one Sell rating assigned over the last three months. At $78.09, the average Royal Caribbean stock price target implies upside potential of 9.2%.

Carnival Corp (NYSE:CCL)

Carnival has the same debt concerns and positive macro trends as Royal Caribbean, but its fundamentals aren’t as strong. Its shares are already up 38.6% year-to-date, so with the weaker fundamentals suggesting a much slower recovery, a neutral view looks appropriate for now.

Although the company’s P/S ratio stands at 1.2 times, well below the industry average and Royal Caribbean’s, Carnival is clearly recovering more slowly. Carnival has yet to report a profitable quarter, although it had put its entire fleet back in service by the end of the year. The company’s booking trends are nearing 2019 levels and exceeded 2019 levels in November.

However, Carnival is losing more money than Royal Caribbean ($6.1 billion versus $2.2 billion), and its net income margin is worse than its competitor’s, at -50.1%.

What is the Price Target for CCL Stock? 

Carnival has a Hold consensus rating based on four Buys, five Holds, and two Sell ratings assigned over the last three months. At $12.30, the average Carnival stock price target implies upside potential of 11.3%.

Conclusion: Bullish on RCL, Neutral on CCL

While Royal Caribbean and Carnival are both debt-laden, there is one clear winner in the race to dig out from the pandemic-driven losses. Street estimates suggest Royal Caribbean could return to its pre-pandemic profitability levels by Fiscal 2025, coming in at $8.92 per share. However, Carnival is expected to be generating only $1.48 per share in earnings at that time compared to its pre-pandemic EPS of $4.35.

Investors inclined to accept the risk in exchange for the potential of sizable returns may be able to pick up Royal Caribbean shares at a deep discount, but they may work best as a long-term play. Carnival could work eventually, but it looks like it will take longer to recover from the pandemic.


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