Carnival (CCL -0.66%) and Royal Caribbean Cruises (RCL 2.27%) suffered their two worst years of revenue declines in recent history during the COVID-19 pandemic. But both cruise line operators weathered the storm and started growing again as the pandemic ended-- even as inflation curbed travel-related spending over the past year. Should investors buy either of these cruise line stocks as a turnaround play for a new bull market?
How rough was the pandemic?
In fiscal 2019 (which ended in November 2019), Carnival's revenue rose 10% with a healthy occupancy rate of 104%. Royal Caribbean's revenue grew 15% in 2019, with an even higher occupancy rate of 108%. Both stocks seemed like stable plays in the travel sector at the time. However, global travel ground to a halt as COVID-19 spread.
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Carnival's revenue plunged 73% in fiscal 2020, though it maintained a high occupancy of 101% across its vessels, which were still in operation. But in fiscal 2021, its revenue dropped another 66% as its occupancy rate dipped to 56%.
Royal Caribbean's revenue plummeted 74% in 2020 as its occupancy stayed high at 102%. But in 2021, its revenue also declined 31% as its occupancy rate shrank to 49%.
Lots of red ink and rising leverage
Both companies also turned unprofitable throughout the pandemic. Carnival posted net losses of $10.2 billion and $9.5 billion in fiscal 2020 and fiscal 2021, respectively. Royal Caribbean racked up a net loss of $5.8 billion in 2020, narrowing it slightly to $5.3 billion in 2021.
Both companies cut costs and took on more debt to stay afloat throughout the pandemic. Carnival ended its first quarter of fiscal 2023 with $32.7 billion in long-term debt -- more than three times higher than its $9.7 billion at the end of fiscal 2019 -- and a high debt-to-equity ratio of 5.6. That's nearly six times higher than its $5.5 billion in cash and equivalents.
Royal Caribbean ended 2022 with $21.3 billion in long-term debt, compared to $8.4 billion at the end of 2019. That's 11 times higher than its cash and equivalents of $1.9 billion and gives it an even higher debt-to-equity ratio of 10.8.
Looking beyond the pandemic
Those losses were gut-wrenching, but Carnival and Royal Caribbean recovered quickly over the past year as the pandemic ended and people started traveling again. Carnival's revenue surged 538% in fiscal 2022 as its occupancy rate jumped to 75%. It expects its occupancy rate to surpass 100% in fiscal 2023, and analysts expect its revenue to rise 72% to $20.9 billion -- which would be higher than its pre-pandemic revenues of $20.8 billion in 2019.
Royal Caribbean's revenue jumped 477% to $8.8 billion in 2022, surpassing its pre-pandemic revenues of $8.7 billion in 2019, as its occupancy rate rose to 85%. It didn't provide an exact occupancy forecast for 2023, but analysts expect its revenue to rise another 47% to $13 billion. Based on Wall Street's expectations and their current enterprise values, Carnival's stock trades at about two times this year's sales, and Royal Caribbean trades at nearly three times this year's sales.
Analysts expect Carnival to narrow its net loss to just $412 million this year as its revenue growth and occupancy rate stabilize. However, Royal Caribbean's bottom line is expected to be back in the black this year with a net profit of $890 million. We should take those estimates with a grain of salt since both companies still face macro headwinds. But it wouldn't be surprising for Royal to return to profitability first after achieving its pre-pandemic revenue levels a year ahead of Carnival.
Which stock is the better buy right now?
I'm not bullish on either of these stocks right now since a slowdown in consumer spending, high fuel prices, and unpredictable currency headwinds could still disrupt their post-pandemic recoveries. But if I had to choose one, I'd pick Carnival over Royal Caribbean for its lower leverage, more confident occupancy forecast, and cheaper valuation.
