Did the Cruise Line Industry Just Take Another Hit to the Chin?

This time it’s Royal Caribbean’s Majesty of the Seas and Explorer of the Seas making headlines for all the wrong reasons, but it might be wise not to overreact to these recent events.

Jan 27, 2014 at 5:00PM

Are you planning on going on a cruise? If so, you might want to read about recent at-sea incidents, including everything from capsizing to fires to norovirus outbreaks. This isn't what most people envision as a dream vacation. Fortunately, most cruises sail without a hitch. The problem is that when unfortunate events do take place, it leads to negative word of mouth and a lack of consumer trust in a cruise line's ability to keep them safe.

The incident that really put fear into people was when Carnival's (NYSE:CCL) Costa Concordia sank in 2012, costing 32 people their lives. It seemed as though this would be an isolated event, but Carnival's Costa Allegra suffered a fire soon after. A year later in 2013, the Carnival Triumph then suffered a fire that led to cabins without power, backed-up sewage, and a limited supply of food. While some passengers praised the crew's efforts to keep everyone as comfortable as possible, others stated that they would never go on a Carnival cruise again.

Also in 2013, Royal Caribbean's (NYSE:RCL) Grandeur of the Seas suffered a fire. At 2:50 a.m., the ship's intercom awoke most passengers with a voice instructing all passengers to put on their life jackets and run to the nearest deck. 

These events have led to some travelers negating a cruise as a potential vacation option. Add to this recent events concerning the spread of the norovirus on Royal Caribbean's Majesty of the Seas and Explorer of the Seas and it isn't likely to help the industry's reputation. That said, Carnival is working hard to restore its reputation, and Royal Caribbean is innovating more than its peers. 

If you're looking to invest in a cruise line that tends to avoid such negative headlines pertaining to safety, then you might want to consider Norwegian Cruise Line (NASDAQ:NCLH). However, Norwegian Cruise Line isn't the most loved cruise line by travelers -- you can read "Best (and Worst) Cruise Lines Based on Traveler Ratings" for more information -- and any dips in Royal Caribbean's stock price related to the spread of the norovirus could be looked at as a potential opportunity. 

Gastrointestinal issues
We've all been there, and it's never fun. Those on a cruise would prefer to be soaking up some sun on the pool deck with a book in one hand and a drink of choice in the other. For 66 of the 2,581 passengers on Royal Caribbean's Majesty of the Seas, this wasn't a possibility. Instead, these passengers were spending the majority of their time in the bathroom, suffering from vomiting and diarrhea. Two of the 844 crew members were also affected.

A few days later, 577 of 3,050 passengers and 49 of 1,165 crew members on Royal Caribbean's Explorer of the Seas suffered the same fate. Explorer of the Seas was on a 10-day cruise to St. Maarten from Cape Liberty, New Jersey. However, the highly contagious norovirus (spread through food, air, and water) acted as the likely culprit for ruining the journey. Explorer of the Seas will now return two days early, allowing Royal Caribbean more time to disinfect the ship. 

Fortunately, most of those affected by the highly contagious norovirus responded well to over-the-counter medicine administered by Royal Caribbean on both cruises. 

It's possible that you will read more news about the spread of the norovirus on Royal Caribbean's Majesty of the Seas and Explorer of the Seas, but don't let it lead you to panicking on an investment in the company. Norovirus is a temporary event. If you're going to worry about an investment in Royal Caribbean, then at least worry about a different factor.  

Valuation concerns
Royal Caribbean is trading at 149 times earnings. Norwegian Cruise Line is trading is also trading at a lofty 104 times earnings. But there is a significant difference between these two companies. Maybe you can spot the difference in the chart below: 

RCL Revenue (TTM) Chart

RCL Revenue (TTM) data by YCharts

Though not by much, Royal Caribbean is growing its top line faster than its SG&A expenses. This is often an indication of quality management. Norwegian Cruise Line hasn't demonstrated such efficiency over the past year.

Carnival lags its peers in this area: 

CCL Revenue (TTM) Chart

CCL Revenue (TTM) data by YCharts

Despite Carnival trading at 30 times earnings, the underlying operation isn't impressive at the moment. 

If you're going to break it down to Royal Caribbean vs. Norwegian Cruise Line, Royal Caribbean wins despite Norwegian Cruise Line having a better safety record as of late. Royal Caribbean has generated $1.44 billion in operating cash flow over the past year, while Norwegian Cruise Line has generated $420.41 million in operating cash flow over the same time frame. This allows for more business reinvestment as well as more capital returns to shareholders. Royal Caribbean currently offers a dividend yield of 2%, whereas Norwegian Cruise Line doesn't offer any yield.  

The big potential negative for both companies is that they're expensive in a consumer environment that features a hesitant consumer. If discretionary incomes were to suffer due to a weakened job market, souring investments, or rising interest rates (the latter two can go hand-in-hand), then both companies would likely suffer.    

The bottom line
At-sea mishaps have led to a lot of negative publicity for the cruise line industry, but Royal Caribbean and Norwegian Cruise Line continue to sell tickets. Their at-sea missteps pale in comparison to Carnival's over the past several years. 

If you're going to invest in Royal Caribbean or Norwegian Cruise Line, your concern shouldn't be about a recent onboard virus, but instead should focus on valuation and the ability of the consumer to continue to spend. At the moment, all is well. Royal Caribbean should be the best investment of the three thanks to efficiency and strong traveler ratings. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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