The cruise industry has become one of the great post-pandemic comeback stories. The COVID-19 contagion forced this industry to shut down for over a year, leaving it without a significant revenue source during that time and causing an extended period of lower revenue as it relaunched.
Today, bookings are at an all-time high for the top two cruise line companies, Carnival (CCL -0.66%) and Royal Caribbean Cruises (RCL 2.27%). However, that factor may leave investors wondering which cruise line stock has the potential for higher returns.
The case for Carnival
Carnival is the largest cruise line. According to Cruise Market Watch, it claims around 43% of all passenger bookings in the industry. Along with the Carnival brand, it also owns lines such as Princess, Holland America, and Cunard.
Fortunately for Carnival, fears about contagion have not dampened the appetite for cruises. The company entered 2024 in its best position ever with regard to bookings. Also, despite strong pricing, it has booked nearly two-thirds of all occupancy for 2024. So strong is demand that it plans to add to capacity by 5% in 2024.
Moreover, total debt has fallen to just over $31 billion versus nearly $36 billion at the end of 2022. During the year, it paid down $4.6 billion in debt, paying off all the debt maturing in 2023, while still holding $5.4 billion in liquidity.
Although Carnival lost $74 million in 2023, it generated about $2.1 billion in adjusted free cash flow. This has positioned Carnival to reduce its massive debt and add capacity as needed.
Still, many investors may have not yet caught on to its recovery. Carnival stock sells at a forward P/E ratio of just 16 times earnings, and that comes after a 50% gain in the stock price over the last year. Given that low valuation, more investors could buy into Carnival's sudden turn into smooth waters.
Why investors might consider Royal Caribbean stock
Still, before seeking permission to board Carnival, investors may also want to bask in the trade winds pushing Royal Caribbean forward. Royal Caribbean, along with the lines it owns, Celebrity and Silversea, now claim about 26% of the passenger counts in the market.
Amid an industry recovery, Royal Caribbean benefited from record bookings in 2023 and experienced its five best weeks for bookings in company history after its October earnings call. Due to this high demand, Royal Caribbean plans to increase capacity by 8.5% in 2024.
Additionally, Royal Caribbean's total debt fell to $22 billion versus $24 billion in 2022. Furthermore, around 80% of its debt is fixed-rate obligations. Given improved bookings, the company will likely pay off the $1.7 billion in debt coming due in 2024 without having to refinance at higher rates.
Moreover, the company returned to profitability in 2024, reporting $1.7 billion in net income versus a $2.2 billion loss the year before. Free cash flow was not as strong, coming in at $580 million. But with $3.1 billion in liquidity, the company is well-positioned to stay afloat in case of trouble.
So far, investors may have missed this recovery story. Currently, the stock trades at around 12 times forward earnings despite rising by over 75% over the last year. Such a valuation suggests Royal Caribbean stock may not be finished rising as it sails onward.
Carnival or Royal Caribbean?
Although both stocks should experience market-beating gains for the foreseeable future, Royal Caribbean seems to have more growth potential. Indeed, it is a smaller cruise company and does not generate as much free cash flow.
However, unlike Carnival, it turned profitable last year. Also, it plans to add more capacity, indicating it is more likely to make market share gains over the next year. Additionally, that factor and the 75% gain in Royal Caribbean stock still left it with a lower forward P/E ratio. Such factors could give Royal Caribbean stock a likely edge over its largest rival at this time.
