Shares of leading cruise operators have long been suffering as the Covid-19 pandemic forced consumers to cancel their vacation plans amid widespread lockdown and fears of contagion.
More recently, cruise companies took another hit as a result of the U.S. Federal Reserve aggressively hiking interest rates, sparking concerns over cruise operators’ piling debt burden. Moreover, the broader economic downturn has thwarted any reasonable possibility of a strong rebound.
As a result, stocks of the biggest names in the leisure cruise industry are on bargain basement discounts, creating an attractive buying opportunity for investors hunting for value. Over the long run, these companies could benefit when the economic tide turns and the historically underpenetrated global cruise market sets sail again.
The largest global cruise company, Carnival (CCL) boasts a fleet of 91 ships. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the U.K.; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia.
The global cruise market has historically been underpenetrated, offering Carnival a long-term demand opportunity. “In years prior to the pandemic, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing,” says a Morningstar equity report.
However, COVID-19 caused a massive disruption to the cruise industry, “which could spark longer-term secular shifts in consumer behaviour, challenging the economic performance of Carnival over an extended horizon,” the report warns.
As such, it may be a while before cruise operators return to pre-pandemic levels of profitability. “On the yield side, we expect Carnival to see some pricing pressure as future cruise credits continue to be redeemed through 2023, a headwind partially mitigated by the return of capacity via rising occupancy,” says Morningstar equity analyst, Jaime Katz, who recently lowered the stock’s fair value to US$22 from US$24, prompted by expectation of a wider earnings loss in 2022.
The world's third-largest cruise company by berths, Norwegian Cruise Line (NCLH) operates 29 ships across three brands, offering freestyle and luxury cruising. The company redeployed its entire fleet in May. Norwegian sailed to around 500 global destinations before the pandemic and is now increasing capacity faster than its peers, expanding its brand globally.
However, the company may be some ways away from regaining the pre-pandemic levels of revenue and profitability. Consumer behaviour around travel changed significantly since the pandemic broke out, which had a sizeable impact on the economic performance of Norwegian, “affecting its ability to generate excess economic rents over an extended horizon,” says a Morningstar equity report.
While consumers returned to cruising after the more than year-long disruption, Norwegian could face pricing competition as global supply shifts to focus disproportionately on the North American consumer, limiting near-term yield upside, the report notes.
The operator could also be impacted by the redemption of future cruise credits through December 2022. “On the cost side, inflated spending on the procurement of goods and higher oil prices could keep costs elevated in 2023,” warns Katz, who pegs the stock’s fair value at US$28. She expects, however, both pricing and costs to normalize over time, rising at a low-single-digit rate longer term.
Royal Caribbean (RCL) is the world's second-largest cruise company, operating 64 ships across five global and partner brands including Royal Caribbean International, Celebrity Cruises, and Silversea.
The pandemic hit the company’s fortunes hard, as with its rivals. However, things appear to be turning a corner. “With virus restrictions largely in the rearview mirror, Royal Caribbean should see modest pricing gains as it digests a few remaining bookings paid for with future cruise credits (into 2023) and takes new reservations,” says a Morningstar equity report.
While some health protocols and cruise resumption costs could remain elevated near term, they will continue to ease up in 2023, boosting profitability, the report adds.
“While Royal Caribbean has carved out a compelling position in cruising thanks to its contemporary product, it still has to compete with other land-based vacations and discretionary spending for share of wallet,” argues Katz, who puts the stock’s fair value at US$80, incorporating third-quarter results, which included Royal Caribbean's return to positive operating cash flow and EBITDA.
To combat effects of the pandemic related restrictions and loss of revenue, RCL reduced operating expenses and capital expenditures.
Further, it reported third-quarter net revenue of US$2.3 billion, just 8% lower than 2019 levels, and up sequentially from a 23% lower total in the second quarter, “a gap that we forecast will close now,” asserts Katz.
