With an exceptionally long and cold winter behind us, many Canadian holidaymakers are planning their annual summer break as they look forward to sunny days and a break from the grind. As every year, a sizable segment of these travelers will be hitting the high seas aboard a cruise liner. Long driven by the Baby Boomer cohort, ocean cruising is increasingly getting transformed by a younger demography seeking experiential travel and bucket-list vacations.
The cruise industry is projected to continue to grow throughout 2019 with 30 million travelers expected to go on cruise, up 6% from 28.2 million in 2018, according to a recent report from the Cruise Lines International Association (CLIA). While the Caribbean and Mediterranean account for half of all cruise itineraries, a growing number of destinations are being added from other parts of the world, including China which accounts for the second largest number of cruise passengers globally after the U.S. As a result, the global cruise industry revenue is forecasted to jump from US$35.5 billion in 2016 to US$57 billion in 2027, reports data aggregator Statista.
As more travelers splurge on cruise vacations, they create a growth tailwind for cruise operators that are responding to demand growth with new destinations, diverse durations and more attractions. The leading players are expanding their fleet, creating and customizing itineraries, on-deck activities and dining options keeping a more diverse pool of customers in focus. Many of these operators are also casting their net beyond their conventional markets to burgeoning but under-served parts of the world, according to Morningstar equity research.
| Carnival Corp | ||
| Ticker: | CCL | |
| Current yield: | 3.65% | |
| Forward P/E: | 11.92 | |
| Price: | US$53.63 | |
| Fair value: | US$66 | |
| Value: | 17% Discount | |
| Data as of Apr. 18, 2019 | ||
The largest global cruise company with a fleet of more than 100 ships, Carnival (CCL) operates nine global brands. The firm’s service and passenger capacity of 200,000 allows it to serve 12.5 million guests annually. With less than 4% of the domestic market ever having cruised and limited international recognition, Carnival’s market is under-penetrated indicating significant upside potential.
“The repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific should help balance supply in high-capacity regions like the Caribbean, which should provide for more strategic pricing tactics globally,” says a Morningstar equity report, which notes that the cruise operator’s global reach and tailored fleet position it better than its peers to capture international markets.
The company’s domestic performance is largely supported by retirees. “This segment will drive demand and create a disconnect between demand and supply of berths for at least the next 10 years as the 65-and-older demographic grows faster than overall cruise industry capacity,” says Morningstar equity analyst, Jaime Katz. Half of Carnival’s customers are sourced domestically where “stable employment should support consumers' willingness to spend, helping the firm continue to deliver double-digit adjusted ROICs,” says Katz who recently trimmed the stock’s fair value from US$69 US$66, to reflect weakness stemming from Brexit and the Italian recession.
Longer term, though, Carnival’s prospects remain bright, thanks to demand from Asia-Pacific. Katz projects pricing to grow at 2% and capacity growth of around 4% annually through 2028.
| Royal Caribbean Cruises Ltd | ||
| Ticker: | RCL | |
| Current yield: | 2.26% | |
| Forward P/E: | 12.32 | |
| Price: | US$120.99 | |
| Fair value: | US$133 | |
| Value: | 8% Discount | |
| Data as of Apr. 18, 2019 | ||
Royal Caribbean (RCL) is the world’s second-largest cruise company operating 60 ships across six global brands. The company also owns a 50% stake in a joint venture that operates Germany’s TUI Cruises, another 49% stake in Spanish cruise operator Pullmantur, and a 67% majority stake in Silversea Cruises.
Royal Caribbean’s brands are known for quality of ships and service, variety of itineraries, choice of destinations, and price. These attributes conspire to drive repeat business. The company operates in an amicable oligopoly where stable pricing and rational competition boost pricing power.
“A continued focus on pricing integrity, which avoids close-in discounting, could ensure the brand remains strong and ticket prices rise in the longer term, while the evolution of onboard offerings could spur incremental revenue growth,” says Katz, who recently upped the stock’s fair value from US$130 to US$133, prompted by strong 2018 results. Katz forecasts annual pricing growth of 2.5%, and annual capacity growth of more than 4% over the next decade.
Upcoming markets like Asia and Europe will provide significant overseas demand potential. “Reaching more deeply into these underserved population bases is imperative for Royal Caribbean’s demand growth over the long term,” she adds.
| Norwegian Cruise Line Holdings Ltd | ||
| Ticker: | NCLH | |
| Current yield: | - | |
| Forward P/E: | 11.21 | |
| Price: | US$56.92 | |
| Fair value: | US$69 | |
| Value: | 14% Discount | |
| Data as of Apr. 18, 2019 | ||
The world’s third-largest cruise company, Norwegian Cruise Line (NCLH) operates 26 ships across three brands, offering both freestyle and luxury cruising. With 11 passenger vessels on order among its brands through 2027, the firm is bulking up capacity faster than its peers while also expanding globally.
With more than 450 global destinations, 54,000 berths, decades of consumer analytics and best practices, Norwegian has become an increasingly relevant competitor in the cruise industry. “We view Norwegian’s freestyle cruising as a differentiated product, catering well to an older demographic, who may want to take their families on holiday, and millennials, who want increasing options,” says a Morningstar equity report, pointing to the operator’s ability to nimbly cater to changing trends.
Despite the lack of switching costs among cruise brands, the inclusion of the high-end Prestige cruises, a growing global footprint and diversified duration of itineraries have fortified Norwegian’s competitive strength, says Katz, who estimates the stock to be worth US$69. Features like scarce capacity (the company will have only 17 ships in operation by the end of 2020), the differentiated freestyle cruising, along with Prestige’s tilt to high-net-worth consumers, “carve out a wide base of consumer demand the firm can continue to penetrate,” notes Katz, who forecasts ROICs to rise from 10% in 2015 to 14% in 2023 as the firm pays down debt and deploys newer, more cost-efficient ships.
