The cruise industry has emerged as a remarkable success story in the post-pandemic era. With the prolonged shutdown due to the impact of COVID-19, the industry faced a considerable revenue drought for over a year. The aftermath led to a slow revenue recovery as the cruise lines gradually resumed operations.
As of today, both Carnival (NYSE: CCL) and Royal Caribbean Cruises (NYSE: RCL) are experiencing an unprecedented surge in bookings. Investors, however, might find themselves pondering over which cruise line stock holds the promise of superior returns.
The case for Carnival
Carnival stands out as the behemoth of the cruise industry, securing approximately 43% of all passenger bookings, as per Cruise Market Watch. Housing not only the Carnival brand but also overseeing lines like Princess, Holland America, and Cunard, it holds a dominant position.
Surprisingly, concerns about contagion haven’t deterred the cruise enthusiasts, putting Carnival in its prime position at the beginning of 2024 with robust booking numbers. Despite commanding strong prices, the company has already booked nearly 66% of the occupancy for 2024, leading it to plan a 5% increase in capacity.
Additionally, Carnival’s prudent financial management is noteworthy, with total debt decreasing to slightly over $31 billion from almost $36 billion in 2022. The company exhibited fiscal responsibility by paying down $4.6 billion in debt throughout the year, settling all debts maturing in 2023, while maintaining a liquidity buffer of $5.4 billion.
Despite posting a $74 million loss in 2023, Carnival showcased resilience by generating approximately $2.1 billion in adjusted free cash flow. This robust cash position positions Carnival to tackle its substantial debt and expand capacity as needed.
Interestingly, the market may not fully recognize Carnival’s recovery, considering its stock sells at a forward P/E ratio of just 16 times earnings, even after a notable 50% increase in the stock price over the past year. With such an undervaluation, there’s potential for more investors to catch on to Carnival’s promising journey into smoother waters.
Why investors might consider Royal Caribbean stock
Before deciding to hop aboard the Carnival ship, investors might want to take a moment to appreciate the favorable trade winds propelling Royal Caribbean forward. Royal Caribbean, alongside its affiliated lines Celebrity and Silversea, now commands roughly 26% of the passenger counts in the market.
In the midst of the industry’s recovery, Royal Caribbean reaped the rewards of record bookings in 2023, marking its five best weeks for bookings in company history post its October earnings call. Fueled by high demand, Royal Caribbean is gearing up to boost its capacity by 8.5% in 2024.
Furthermore, Royal Caribbean managed to trim its total debt to $22 billion from $24 billion in 2022, with a noteworthy 80% of its debt being fixed-rate obligations. With an upswing in bookings, the company appears poised to comfortably settle the $1.7 billion debt maturing in 2024 without the need to refinance at higher rates.
Adding to its positive trajectory, the company returned to profitability in 2024, reporting $1.7 billion in net income compared to a $2.2 billion loss the previous year. While free cash flow didn’t reach stellar heights at $580 million, Royal Caribbean boasts a solid financial position with $3.1 billion in liquidity, providing a safety net in turbulent waters.
Despite the impressive recovery story, investors might have overlooked Royal Caribbean’s potential. Currently trading at approximately 12 times forward earnings, even after a remarkable 75% surge over the past year, the valuation suggests that Royal Caribbean’s stock may have more room to ascend as it continues its onward journey.
Carnival or Royal Caribbean?
While both stocks are anticipated to enjoy gains surpassing the market in the foreseeable future, Royal Caribbean appears to possess greater growth potential. Despite being a smaller cruise company with comparatively less free cash flow, it turned a profit last year, a feat not achieved by Carnival.
Furthermore, Royal Caribbean’s intention to expand its capacity signals a proactive approach likely to result in gaining market share over the coming year. Notably, even with a substantial 75% increase in Royal Caribbean’s stock value, it still maintains a lower forward P/E ratio compared to Carnival. These factors collectively suggest that, currently, Royal Caribbean’s stock might have a favorable edge over its larger rival.
