Springtime has been kind to investors in the country's three largest cruise line operators. All three stocks are up at least 42% in the second quarter. Maybe it's not a surprise that the larger the player -- by revenue -- the stronger the pop since the end of March.
Carnival Corp. (CCL -0.66%) is up 56%, Royal Caribbean (RCL 2.27%) is up 46%, and Norwegian Cruise Line (NCLH -1.60%) is up 42%.
Things can get even better from here. We're heading into the telltale summer season, and the next few months will test the seaworthiness of the recent gains. If industry bookings remain strong and passengers keep relishing the experiences, the three stocks could continue beating the market in the second half of this year and beyond.
Sailing into uncharted waters
Cruise line stocks have had the hardest path back from the pandemic among travel stocks, and that is understandable. Cruise ships became an early cautionary tale about the rapid spread of a highly contagious disease, and cruise ships remained largely unavailable long after the return of other forms of vacation transportation.
Fleets had to do some pretty desperate things to stay afloat during the downtime, and it happened at a terrible time with credit risks rising and stock prices shrinking. The share count at Norwegian Cruise Line has nearly doubled since the pandemic started, up 96% since the end of fiscal 2019. The number of outstanding shares has climbed 75% at Carnival and a more reasonable 22% at Royal Caribbean in that time. The debt load has more than tripled at Carnival, while its two smaller rivals have seen their debt roughly double.
Image source: Getty Images.
The dilution and heftier interest expense payments aren't pretty, but they did the trick. All three companies expect to report record revenue in 2023. Getting back to peak profitability will take a bit longer. Royal Caribbean and Norwegian should turn a profit this year. Carnival is expected to follow next year. It will take a couple of years to hit new highs in earnings on a per-share basis after all of the new stock that was issued as a flotation device, but the industry is clearly heading in the right direction after the mother of all open sea rescues.
Bookings have been strong, and investors will get fresh news out of the bellwether soon. Carnival reports numbers for its fiscal second quarter next week.
Wall Street is walking up the gangplank to board cruise ship stocks, as if that's not already clearly evident by the recently buoyant stock moves. Citi analyst James Hardiman boosted his price target on Carnival from $14 to $18 late last week, opening a 90-day positive catalyst watch ahead of next week's financial update and rising hopes for a blowout summer travel season. Hardiman upgraded the stock last month, lifting his price target for the shares from $10 to $14 at the time. It's going to turn heads when a notable analysts revises a price target by a whopping 80% in the span of less than a month.
Market pros have also been inching their price targets higher for Royal Caribbean and Norwegian. It's not a surprise. The "revenge travel" surge that helped lift most travel and tourism stocks in 2021 and 2022 is finally coming around to raise the water for cruise line stocks in 2023. The surge in share counts and debt levels over the past four years will make it important to consider actual valuations over stock charts. All three cruise lines will have to do a lot more to take back their previous all-time highs. However, sentiment is rising and this summer could be exactly what the industry has needed for a long time.
