The stocks of cruise ship operators Carnival (NYSE:CCL) and Royal Caribbean (NYSE:RCL) continue to be submerged near their 52-week lows and are looking good from an investment standpoint. So which one should you go with?

After I wrote a few weeks ago that Carnival reduced guidance again for 2006, an avid Fool reader asked if I also considered Royal Caribbean as an investment. I most definitely do, since I consider the cruise-line industry a two-horse race between the companies. I mentioned that I consider Carnival the stronger company, but thought I would take some time to explain my reasoning. This is what my battle between the cruise liners found.

Growth Rates

Advantage: Carnival
Carnival is bigger and growing faster. Over the past five years, annual sales growth for Carnival has been about double that of Royal, and its $11 billion 2005 sales were also about double Royal's reported $4.9 billion. The trend is similar for earnings, as Carnival has increased earnings per share 11% on average annually, while Royal has reported 5.6% average annual growth over the past five years. Carnival's dividend has also grown more than four times as fast, and its current dividend yield is almost a full percentage point higher.

Margins

Advantage: Carnival
Carnival's margins are also superior. Royal targets a more premium end of the market -- passengers interested in longer cruises, who tend to be more affluent, experienced passengers. Understandably, Royal must therefore spend more on the whistles and bells for its passengers. Carnival, on the other hand, caters to "a variety of different lifestyles and budgets, all at an outstanding value." Thus, it likely focuses on more moderate ship amenities and related services and is able to leverage those cost savings into better margins. If you're going on a cruise, take Royal Caribbean, but if you're going to invest in a cruise line, take Carnival based on margins.

Profitability

Advantage: Carnival
Carnival's returns on assets, equity, and invested capital exceed Royal's. Over the past year, ROE has been similar, but since Royal has higher debt levels, there's a larger disparity between ROIC. Specifically, Royal's net debt-to-total capitalization percentage recently stood near 40%, while Carnival's stood closer to 20%. It's also worth noting that Carnival's numbers over the last year and past five years have been rather consistent.

Valuation

Advantage: Royal Caribbean
Royal has a lower valuation, which is understandable; Carnival is growing faster, and has higher margins and profitability measures. This can be a big advantage, depending on how much lower the valuation becomes, both on an absolute basis and relative to Carnival. Carnival usually trades at a 10%-20% premium to Royal. It's close to 20% right now, but both stocks are currently trading near the low end of their five-year valuation range, so both are good bets in my mind.

Compelling overall industry
Carnival is clearly the better-run company, but both Carnival and Royal are growing in a compelling industry. The domestic cruise market has grown 10% annually since 1970, and Carnival estimates that only 16% of the U.S population has ever taken a cruise. The penetration rate is even lower in Europe and the rest of the world. It's expensive to build cruise ships, but this also creates an economic moat, since few firms have the capital or know-how to compete. There have also been overcapacity concerns, but the industry should be able to handle it as aging demographic trends lead to more leisurely cruise passengers.

In terms of other risks, the industry will always be affected by weather, fuel, global politics, and economic cycles. Right now, investors are overly concerned about high fuel prices and uncertainty as to whether hurricanes have permanently increased in the Caribbean because of global warming. And economic fluctuations influence the amount of discretionary income consumers can spend on cruises and travel in general. These concerns can be used to your advantage as a way to buy the stocks during low tide.

The face-off finale
At this point, based on where each company is currently trading, the downside appears to be limited for both. I don't think there's any hurry to invest, since 2006 will be weak for both companies. But the long-term story for the cruise industry should be one of continued steady and profitable growth, with the spoils splashing mostly Carnival's way.

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Fool contributor Ryan Fuhrmann has no financial interest in any shares mentioned. Feel free to email him with feedback or to discuss the company further.