As in many industries, cruise operators close track certain metrics as part of their financial reporting. For the biggest player in this space -- Carnival (CCL +1.02%) -- that means keeping a keen eye on revenue yield, how much the company makes per available passenger cruise day on each ship.
In this segment from Industry Focus: Consumer Goods, the cast digs into Carnival's business, which controls 50% of the cruise market by passenger count.
A full transcript follows the video.
This video was recorded on Feb. 20, 2018.
Vincent Shen: The last thing I'll get into in terms of high-level stuff in the industry before we start looking at those three companies. If you're an investor, with these companies, you're going to be able to compare the common financial metrics that we talk about, things like revenue and earnings growth, what their margins are like, what their return on invested capital is. But the big number that the industry monitors is revenue yield, or revenue per available passenger cruise day. Different companies call it different things, but ultimately what this tells us is how much the company is making across its fleet given the availability of rooms on each ship, and then the length of the cruising season for that ship.
So with that background, we're going to look at some of the actual players now. For our purposes, the three companies that really matter here are Carnival, ticker CCL, Royal Caribbean, ticker RCL, and Norwegian Cruise Line, ticker NCLH. Together, they claim over 80% of the market share in this industry. It's pretty impressive. Let's start with Carnival.
Dan Kline: It's important to note, too, that Carnival is the big boy.
Shen: Yes.
Kline: By passenger total, not by revenue, Carnival has about half of the total cruising market.
Shen: Yes. 50% market share by passengers. As you mentioned, 12.1 million that they handled in 2017. They have by far the largest fleet, too, over 100 ships. Their passenger capacity is about 230,000, which is really cool. They operate a number of different cruise lines in their portfolio.
In addition to their namesake Carnival line, they have Princess, Costa, and additional cruise lines that will target specific geographies usually. Carnival, for example, operates almost entirely out of U.S. homeports. Costa is in Italy, France, and Spain. AIDA for Germany. The company had $17.5 billion of revenue in 2107. And for this industry, you'll see their net income margins, for example, usually around 15% to 20%. These companies spend a ton of money in their capex building out new ships, but they also generate a ton of cash. Carnival, for example, last year, had free cash flow of $1.5 billion, and that was after $3 billion of capex spending on their investments in current ships and new ones.
Kline: And their return on investment in a new ship is quick, much like when a new hotel opens at a theme park. It's pretty much the same. People want to stay there. So when a new Carnival ship, especially the biggest classes that have new amenities, they will sell out faster at higher prices. So you might hurt yourself down the line in taking away what would have been lower-paying business from older ships, but in general, there's a huge push when a new ship comes out.
Shen: So that metric that I mentioned, the revenue yield, the gross revenue yield for this company is growing. I should also mention that 2017 was a very strong year for the industry overall. To give you an idea of what they're dealing with here, their gross revenue yield hit about $210 in 2017, so it was up 3.9%. Keep in mind, in terms of the revenue breakdown for these companies, their passenger ticket revenue usually makes up about 75% to 80% of the top line, and everything else is onboard. The extra pass at the bar, and the excursions, and things like that.
Kline: It's a little harder for Carnival, because the ticket prices tend to be lower, so in the mix, the onboard is a little bit more important.
Shen: Then, something else to note that I thought was really jaw-dropping is, as of November 30th, the company has 18 cruise ships on schedule for delivery between 2018 and 2022. That adds for them passenger capacity of over 72,000. That's not net, because as you mentioned, some older ships will drop out of the fleet in that time.
But the thing that I've seen with Carnival, and also the other cruise operators, too, they say outright that their largest long-term growth opportunity period is the Chinese market. And Australia and Asia accounted for only 15% of their revenue last year, so there's still quite a bit of opportunity there.
Kline: There's absolutely a risk of having too much capacity. And just because ships are ordered, there are points where they could be canceled. So yes, they have their long-range plans. But the other thing we didn't mention about the past year, which was very strong, and it speaks to the revenue model, is we had a terrible hurricane season. And the hurricanes devastated many of the traditional ports.
One of the nice things about the revenue model is, I booked a cruise eight months ago. Pretend I did. The hurricane season happens, and we were supposed to stop in Nassau, well, the port in Nassau was destroyed. It wasn't, but let's pretend it was. The cruise line already has your money. You're already booked. Maybe you have travel insurance. Maybe you paid for the ability to cancel. But they don't cancel that cruise. They change where the cruise is going. And they have a period of time to market, "Hey, just because this happened doesn't mean we aren't cruising, doesn't mean you won't still have fun." So they have a little bit more, call it long-term flexibility. If a theme park loses a week due to a hurricane, there's kind of no way to make that up. But with the cruise ships, they don't sail through hurricanes, they move them around so they don't get hit, they can change itineraries, they can market to you, "Hey, I know you're not going where you think you were going, but it's still going to work for you."
Shen: And that's something that I think appeals to a lot of people who invest in these cruise stocks, there is still that stability in their business model.
Kline: They can fix a mistake.
Shen: So they have that seasonality, and there's going to be lumps there, obviously, in terms of the demand with the seasons. But we haven't really seen a big downturn for this industry since the financial crisis.
Kline: And actually, all three of these companies, though didn't look like they do now, they were all very resilient during the crash partly because there's a certainty to the price you're paying, at least in your head, and people were booked before their stocks tanked.
Shen: So they will take their blows, for sure, when there's a broader economic downturn. But overall, keep in mind that these companies also, with Carnival and Royal Caribbean, they returned lots of capital to their shareholders. The company pays I believe a 2.5% dividend or so, and they repurchased 63 million shares, about $3.1 billion, since late 2015. So just in the past couple of years. And they're operating with a very reasonable payout ratio, so that's not something that's really at risk. Again, I think that's something that really appeals to the investors that like that more stable business.
