Tuesday is looking like a good day to own cruise line stocks, with shares of Royal Caribbean (RCL 3.04%) rising 2.7% through 10:20 a.m. ET, Norwegian Cruise Line Holdings (NCLH 7.53%) up 3.5%, and industry leader Carnival Corporation (CCL 4.65%) leading the industry higher today as well -- up 3.9%.
What's got cruise investors in a lather today? In short: a bullish report on the industry's growth prospects.
Investors in the travel and tourism industry in the U.S. can look forward to 4% average annual growth over the next decade, according to a new report from the World Travel and Tourism Council (WTTC). And of particular relevance to cruise stock investors is that cruise lines will be leading that charge higher.
Revenues in this industry have yet to regain the levels they enjoyed prior to the coronavirus pandemic. Indeed, when you compare Q1 2022 results at Carnival, for example, with the company's performance in the last quarter before the pandemic struck -- Q1 2020 -- revenues remain down roughly 66%.
But perhaps not for long.
According to the WTTC report, cruise companies can expect to surpass not only early-2020 revenues, but the revenues from its best year ever -- 2019 -- as soon as next year. By 2026, cruise stocks could be putting up numbers that "beat" their 2019 performance "by 12 to 28%," reports CruiseHive.com.
That sounds pretty optimistic -- but what would it mean for investors, in dollars and cents? Let's take a middle-of-the channel approach and assume 20% improvement -- the midpoint of that projected range. In the case of Carnival, this might imply 2026 revenues as high as $25 billion and profits per share of $5.18 (giving the stock a very-forward P/E ratio of less than 3.0).
For Norwegian Cruise, 20% improvement over 2019 would mean sales of $7.8 billion, $5.16 per share in profit, and a P/E of just a little more than 3.0. For Royal Caribbean: sales of $13.1 billion, $10.74 per share in profit, and a pricier P/E...that is still less than 6.0.
These all sound like very attractive valuations, but with one big caveat: Since the pandemic struck, Carnival has added more than $20 billion in long-term debt to its balance sheet to help it survive more than 15 months of not being able to cruise at all. Royal Caribbean loaded up with more than $11 billion in new debt, and Norwegian Cruise more than doubled its debt burden, adding $6.5 billion in new debt.
Meanwhile, interest rates on that debt are rising at the same time that inflation (for example, the rising cost of marine diesel fuel) raises the cost of operating even further.
While it's hard to make predictions, especially about the future (as the old saying goes), I'd venture to say that it's going to be harder for cruise lines to earn a profit than it was in 2019 -- even if the WTTC is right, and even if these companies are 20% bigger. Caveat investor.