After a brutal pandemic, the cruise line industry has not only recovered but also benefited from record bookings. This has been a boon, especially to the second- and third-largest cruise line stocks, Royal Caribbean (RCL +0.38%) and Norwegian Cruise Line Holdings (NCLH +0.00%), which are locked in a competitive battle with the largest company in this space, Carnival Corp.
Although both Royal Caribbean and Norwegian face similar challenges, one probably holds greater potential to sail to higher returns. Let's take a closer look to see how each company compares.
Royal Caribbean vs. Norwegian
The cruise industry appears to have bounced back from the worst period in its history, the COVID-19 pandemic. During the 15-month shutdown induced by the pandemic, each company had to let most of its staff go and borrow money to keep their businesses afloat while they earned almost no revenue. And even when they sailed again in mid-2021, it took several quarters to fill ships back to capacity.
Fortunately, both companies have moved on from that time, and their customers have returned. Admittedly, neither company matches the 37% revenue share claimed by Carnival. Still, each owns more than one brand and stands out over smaller cruise lines such as Disney, Viking Cruises, and Switzerland-based MSC Cruises, the fourth-largest cruise line.
Royal Caribbean includes its namesake cruise line, as well as Celebrity and Silversea. These three cruise lines claim about 24% of the industry's revenue, according to Cruise Market Watch.
Norwegian operates its flagship cruise line and owns two smaller lines, Oceania and Regent Seven Seas. Cruise Market Watch says it generates 14% of the industry's revenue.
Moreover, both companies have benefited from record bookings. The industry defines 100% booking as having two passengers in every cabin. By that definition, Royal Caribbean claimed a 107% load factor in the first quarter of 2024, while Norwegian's cabins were 105% occupied during the same period.
How they compare financially
This recovery has dramatically boosted the financials of both companies. In Q1, Royal Caribbean reported $3.7 billion in revenue, a 29% yearly surge. That increase far exceeded the growth rate, allowing it to report $360 million in net income attributable to the company, well above the $48 million loss in the year-ago quarter.
Norwegian did not grow as fast, but its $2.2 billion in Q1 revenue rose 20% over the previous year. As with Royal Caribbean, slower growth in operating expenses allowed it to earn $17 million in profits, up from the $159 million loss in the same quarter last year.
Still, the major difference between the two is debt loads. Royal Caribbean holds a total debt of around $20.5 billion, far above its $5.3 billion in stockholders' equity. Norwegian's total debt is $13.7 billion, but its shareholders' equity is $362 million, making its debt burden much heavier in relative terms.
That may explain why Royal Caribbean plans to spend $3.4 billion in capital expenditures, versus just $575 million for Norwegian. That means Royal will add more ships to its fleet, which should help it grow its market share faster.
Valuations seem to offer a mixed picture of which stock is more expensive. Despite its larger size, Royal Caribbean stock sells for 20 times earnings, lower than Norwegian's 26 price-to-earnings (P/E) ratio. Conversely, from a price-to-sales (P/S) ratio perspective, Royal trades at a 3.0 P/S ratio versus just 0.9 for Norwegian.
Since profits can vary more than sales, one would have to assume Norwegian is the lower-cost stock. Still, the relatively lower debt burden and the greater capacity to add new ships could make Royal Caribbean stock worth the premium.
A solid choice for setting sail
Royal Caribbean and Norwegian have recovered from the pandemic and will probably continue to benefit from record bookings. Still, Royal Caribbean is likely the more solid choice for investors.
Admittedly, Royal Caribbean's debt level is higher, and its stock is more expensive when measured by P/S ratios. Nonetheless, its greater capacity to add ships makes it more likely to increase its market share. That situation should allow it to generate more profit and pay off more debt, which should ultimately lead to higher returns for shareholders.
