Earnings season has come to a close for the three publicly traded cruise lines. Once again, it's Royal Caribbean (RCL +8.64%) at the head of the pack in this fiscal regatta.
This isn't meant to discredit the inspiring comeback for the industry itself. Shares of Norwegian Cruise Line (NCLH +6.62%) may have plummeted 15% on Wednesday after posting mixed financial results, but the third-largest player in this space still joins its peers in raising its earnings guidance with forward bookings at an all-time high. Carnival Corp. (CCL +7.47%) -- the top dog by revenue and fleet size -- set the proper bullish tone in late March with its update, as its fiscal year ends a month earlier than its smaller rivals.
It's just becoming clearer that Royal Caribbean is the class act for investors. Let's take a look at some of the reasons Royal Caribbean is a cut above Norwegian and Carnival.
NYSE: RCL
Key Data Points
1. Revenue growth matters
After several years of losses in the wake of the pandemic, all three cruise lines are now very profitable on a trailing basis. The operator recovery has become a pretty spectacular turnaround story on the bottom line, but let's literally start at the top. Here is how all three players held up in terms of revenue growth this season.
- Royal Caribbean: Revenue up 29%
- Carnival: Up 22%
- Norwegian: Up 20%
All three managed to top 20% in revenue jumps for their latest quarter, but Royal Caribbean is clearly the faster vessel. Perhaps more importantly, Royal Caribbean is the only one of the three operators to beat analyst revenue targets. Carnival and Norwegian fell just shy of what Wall Street pros expected.
Image source: Getty Images.
2. Margins matters
Royal Caribbean commands a higher enterprise value than Carnival -- $56.3 billion against $47.9 billion -- despite being the silver medalist in total revenue. A big reason for the premium investors are willing to pay for Royal Caribbean is how much better it is than the competition at milking more of its revenue to the bottom line.
Carnival's trailing bottom line is depressed because it was the last of the players to turn profitable, and its net margin over the last four quarters is an unflattering 1.8%. Norwegian is at 3.8%. Royal Caribbean is at 14.3%. It's not even close, and it's why the faster-growing Royal Caribbean is the one with the lowest trailing earnings multiple of 18. Norwegian is at 20, and Carnival is at a depressed 45.
This isn't just a matter of Royal Caribbean mastering the recovery process better than its fellow operators. Go back to 2018 and 2019 -- the last two years before the COVID-19 crisis rocked the business -- and Royal Caribbean was also leading the way then under more typical maritime conditions.
| 2018 Net Margin | 2019 Net Margin | |
|---|---|---|
| Royal Caribbean | 19% | 17% |
| Carnival | 17% | 14% |
| Norwegian Cruise Line | 16% | 14% |
Source: S&P Global Market Intelligence.
3. Stock returns matters
Last year was great for shareholders of cruise line stocks. Royal Caribbean led the way with a blistering 162% jump in 2023. Carnival rose a healthy 130%, and even Norwegian was a strong absolute performer as it brought up the rear with its 64% increase.
A winner one year isn't likely to repeat the feat the following year, but let's check the tape so far in 2024 through the May 1 close:
- Royal Caribbean is up 6%
- Norwegian is down 20%
- Carnival is down 22%
You already know Royal Caribbean has the lowest price-to-earnings (P/E) ratio despite its superior revenue growth, historically chunkier margins, and now its stronger recent capital appreciation. What happens going forward as Norwegian and Carnival take advantage of the higher ceiling for improvement?
Well, based on the midpoint of each company's guidance or analyst estimates for fiscal 2024, Royal Caribbean, Carnival, and Norwegian are trading for forward earnings multiples of 12.7, 14.4, and 12.2, respectively. Look out to next year, and all three are trading for less than 11 times what Wall Street pros are modeling.
Since they are all cheap, why wouldn't you go with the clear leader on nearly every front? Buy all three if you don't want to put all your ships in one fleet's basket, but don't be surprised if Royal Caribbean continues to be the one to deliver the largest gains.
