Various economic measures are pulling in opposite directions, making it difficult to determine just what the most likely course forward is. But – at least one piece of the puzzle is pointing toward continued recovery and economic health. Cruise stocks are doing well, a reflection of a consumer base that wants both vacation and can afford to pay for leisure.
As the rate of inflation has slowed in the past year, and the expectation of interest rate cuts this year has risen, the long-term prospect for cruise lines has improved. Data from the Cruise Lines International Association points toward a record level of cruise passengers this year, estimated at 35.7 million travelers for 2024. This is a strong increase from the 31.5 million passengers on cruise ships last year – and it is 6% higher than the pre-pandemic year of 2019. In all, it looks like the cruise industry will have a solid year, and cruise stocks are expected to continue delivering high returns for investors.
Bank of America analyst Andrew Didora has taken the next logical step and analyzed the cruise line sector to identify its best stocks. Here we’ll take a look at Didora’s take on Carnival (NYSE:CCL) and Royal Caribbean (NYSE:RCL), two major names in cruise lines, and see which one he has chosen as the superior cruise stock to buy.
Carnival
We’ll start with Carnival, one of the world’s largest and best-known cruise line operators. At the customer-facing end, Carnival works through a set of cruise brands. These include such well-known names as Princess Cruises, Holland America, and the venerable British line Cunard – all in addition to Carnival’s own eponymous brand, the Carnival Cruise Line. The company’s own line is known for its large ships equipped with a distinctive red-and-blue funnel shaped in the form of a whale’s tail fluke.
The core of any cruise line is its ships, and Carnival boasts 91 vessels, in a combined fleet across all of its brands. These include the 23 ships that sail under the Carnival name, as well as the 15 Princess Cruises vessels and the 11 Holland America liners. The Cunard name only has three ships in service, but two of these are the famous liners Queen Mary 2 and Queen Elizabeth.
In the last quarter reported, fiscal 1Q24, Carnival announced the first new builds for its fleet in five years. The new ships are scheduled for delivery in 2027 and 2028. In addition, Carnival has been moving its fleet toward liquefied natural gas (LNG) as a power source, a move to make its vessels both cleaner and more efficient. The company has 10 LNG ships in service, with three more on order.
Carnival’s combination of well-known brand names and sound execution brought the company a total of $21.6 billion in revenues for its fiscal year 2023, an all-time high level. The company’s cash position at the end of 2023 was also sound, with $2.1 billion in adjusted free cash flow for the year, based on $4.3 billion in cash from operations.
In the fiscal 1Q24 period, Carnival reported a total of $5.4 billion in revenues, described as a record. The company’s total revenue was up 22% year-over-year and came in $10 million above the forecast. At the bottom line, Carnival saw a net loss of 14 cents per share; however, it’s worth noting that this was 4 cents per share better than expected. Carnival’s total first-quarter customer deposits reached $7 billion, a record that eclipsed the previous first-quarter record by $1.3 billion.
In one downbeat note, Carnival reported that it expects to see a $10 million hit this year to its full-year income. This hit is due to the collapse of the Key Bridge in Baltimore, Maryland. The Port of Baltimore is one of Carnival’s homeports, and the bridge debris has blocked the entrance to the city’s inner harbor. This will impact sailings from the Port of Baltimore for the foreseeable future, although Carnival will be able to shift sailings to other East Coast ports.
Turning to Bank of America analyst Andrew Didora, we find that he is upbeat on Carnival heading into next year, based on solid bookings and the company’s ability to start working down corporate debt.
“For 2Q24 and full year 2024, CCL’s outlook was mostly as we expected despite some Red Sea disruptions, and the company continued to call out its strong booked position. With 2024 inventory running low, a focus on 2025 bookings could help provide earnings stability next year… Further balance sheet improvement is a key to our thesis on the stock, and CCL continues to execute. During 1Q24, CCL redeemed over $600M of debt, most notably its 9.9% second-lien notes in full, with $400M repurchased at a discount,” Didora opined.
These comments back up Didora’s Buy rating on CCL shares, and his $23 price target implies a 47% upside for the next 12 months. (To watch Didora’s track record, click here)
Bank of America is far from the only bull on Carnival; the company’s Strong Buy consensus rating is based on 15 analyst reviews that break down to 14 Buy recommendations and a single Hold. The shares are trading for $15.61 and the $22.75 average target price suggests ~46% gain in the year ahead. (See Carnival stock forecast)
Royal Caribbean (RCL)
The next stock we’ll look at is another leader in the global cruise industry, Royal Caribbean. This company boasts a $35 billion market cap and, like Carnival, operates through a network of branded subsidiaries. Royal Caribbean’s operating brands include three wholly-owned cruise lines, Royal Caribbean International, Celebrity Cruises, and Silverside Cruises, and the company has a 50% stake in each of TUI Cruises and Hapag-Lloyd Cruises.
These brands support a fleet of 65 vessels, and the company had another 8 on order at the end of 2023. The vessels sail to and from some 1,000 destinations globally, offering first-class accommodations to first-class locations. Last year, Royal Caribbean had a total of 1,939,360 passengers carried, and an aggregate of 12,605,093 passenger cruise days; key metrics for a cruise company. Year-over-year, those numbers were up 11% and 14%, reflecting strong gains in the cruise company’s occupancy rate. In the fourth quarter of 2022, the company had an occupancy rate of 94.9%; in 4Q23, that was up to 105.4%.
Royal Caribbean also reported sound financial results for 4Q23. The company’s top line was $3.33 billion, up 28% from the prior year period – although it did slightly miss the forecast by $30 million. On earnings, Royal Caribbean reported a non-GAAP EPS of $1.25, 12 cents per share ahead of expectations. And, like Carnival above, Royal Caribbean has been improving its liquidity situation since accumulating debt during the pandemic crisis. The company finished 2023 with $3.1 billion in available liquid assets, including cash, cash equivalents, and undrawn credit.
For Didora, in his Bank of America coverage, the key point here is that not all cruise lines are created equal, and some have had more success than others in reducing debt. He acknowledges the positives in Royal Caribbean’s recent performance, but comes down to a Neutral (i.e. Hold) rating on the stock.
“RCL continues to execute well as industry demand remains strong despite some cost headwinds… Cruise lines have taken on considerable amounts of debt in the past few years and we believe a long road ahead remains to de-lever and return to pre-pandemic balance sheets. However, we now see more balanced risk-reward in the near term across the group given cruise lines are still exposed to macro risks and potentially slowing consumer spending and estimates already reflect a return to peak EBITDA in 2023,” Didora opined.
Along with his Neutral rating, Didora gives RCL a $135 price target, suggesting that the shares will stay range-bound for the foreseeable future.
Overall, RCL shares have a Strong Buy from the Street’s analyst consensus, reflecting a more bullish sentiment than Bank of America allows. The shares are trading for $139.10, and their $150.67 average price target implies a potential one-year upside of ~8%. (See RCL stock forecast)
And with that, the Bank of America verdict is in – according to the firm’s leisure stock expert, Carnival is the superior cruise stock to buy.
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
