With a positive outlook for the cruise industry starting to offset negative sentiment, investors are wondering if it is time to initiate or add to existing positions in cruise line stocks.
Let's take a look at two major players in the cruise industry and determine which of these two iconic companies makes a better buy in today's market.
The case for Carnival
Down more than 83% from its pre-pandemic highs, and 88% below its all-time high, Carnival (CCL 0.91%) now trades in a price range first reached by the stock in the 1990s. Is it time to buy the dip or abandon ship?
NYSE: CCL
Key Data Points
In the fourth quarter of fiscal 2022, Carnival's per diem passenger revenues outperformed 2019 levels. That's certainly a start.
The Miami-based cruise operator also closed out the year by breaking bookings records during its annual Black Friday and Cyber Monday sales. During the Q4 earnings call, CEO Josh Weinstein encouraged, "We're gaining momentum on our return to strong profitability."
Indeed, occupancy has been progressively improving for Carnival, which expects to see 90% or higher occupancy in the current quarter. By this summer, the company expects occupancy to reach -- and surpass -- pre-pandemic levels.
Despite improved company performance, Carnival faces looming uncertainties from both COVID and the ongoing war in Ukraine.
An inconsistent reopening of the cruise industry across the globe presents a major challenge, with each country posing different COVID protocols. And Russia's war in Ukraine has severely impacted Carnival's European itineraries and significantly reduced consumer confidence in the region.
The case for Royal Caribbean
Similar to its rival Carnival, Royal Caribbean (RCL 1.80%) stock has fallen dramatically since the pandemic, now trading roughly 61% below its January 2020 highs. In an industry poised for recovery, is Royal Caribbean the better buy?
NYSE: RCL
Key Data Points
For one, Royal Caribbean's bookings look better now than before COVID hit. Accelerating from the second to third quarter of 2022, reservations now stand at a level "significantly higher" than 2019 bookings. Although Q4 results have not yet been reported, Royal Caribbean expects Q4 bookings to remain high.
And thanks to revenge travel demand amid higher prices, the cruise carrier earned its highest revenue in the past 12 quarters in Q3 of 2022 -- $2.99 billion, marking a more than 600% increase year over year.
The Miami-based cruise operator finally posted a net profitable third quarter, carrying in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $742.3 million.
Contending with the same industrywide headwinds as Carnival, Royal Caribbean continues to endure inflation and supply chain disruptions, mostly in the form of higher fuel and food costs.
While Chief Financial Officer Naftali Holtz anticipates costs to remain high for the time being, he also stated that improved occupancy, better staffing, and more relaxed COVID restrictions should offset their impact on profitability looking ahead.
Which cruise stock is a better buy right now?
Since Carnival's last quarter showed a net loss, a good way to compare the two companies is using their price-to-sales ratios. Based purely on revenue over the trailing 12 months, a stock's price-to-sales ratio can help reveal whether a company is undervalued or overpriced based on its current market cap -- a lower ratio being preferred.
| Metric | Carnival | Royal Caribbean |
|---|---|---|
| Market cap | $9.9 billion |
$12.4 billion |
| Price-to-sales ratio | 0.811 | 1.72 |
Data source: E*trade, company reports.
With a price-to-sales ratio less than half of Royal Caribbean's, Carnival is today's clear winner and could even be undervalued at its current share price.
With currents of optimism starting to wash ashore for the cruise industry, both of these beaten-down cruise stocks stand to see some recovery -- as long as the world stays on course toward "normalcy."
