Shares of cruise ship operator Carnival (NYSE:CCL) have risen 7% over the past 12 months, easily outperforming rival Royal Caribbean's (NYSE:RCL) 1% gain and the S&P 500's 7% decline. While those gains aren't jaw-dropping, Carnival remains a surprisingly stable play in a volatile market, thanks to low fuel prices and healthy demand for its cruises. But looking ahead, can Carnival stay ahead of the market and experience its best year ever in 2016?

Carnival's Adonia. Source: Carnival.

Why Carnival could rise
Last quarter, Carnival's fuel costs fell 33% annually, thanks to plunging oil prices and clever hedging strategies. That decline in fuel prices, along with lower food, payroll, commission, and ship operating costs, reduced Carnival's operating expenses by nearly 10% annually. As a result, its operating cash flow rose 14% to $1.28 billion, and non-GAAP earnings improved 11%.

Global demand for cruises is still rising. Industry trade group Cruise Lines International Association recently forecast that 24 million global passengers will take cruises in 2016, up from 23 million in 2015 and 22.1 million in 2014. To capitalize on that growth, Carnival plans to expand its fleet size from 99 to 103 ships this year. Cruise Market Watch estimates that Carnival controlled 48% of the market by passengers last year, compared to just 23% for Royal Caribbean. Carnival also believes that its expansion into China, where it added a fourth ship last year and recently inked two joint ventures, will tap into the growth of the country's middle class.

Carnival's stock is reasonably valued at 22 times earnings. Royal Caribbean has a pricier P/E of 33, while the resorts and casinos industry has an average P/E of 22. Carnival's 2.4% dividend is also higher than Royal's 1.75% yield. Over the past 12 months, Carnival paid out 37% of its free cash flow as dividends, indicating that it has plenty of room to raise that payout. Lastly, Carnival's growth probably won't peak anytime soon -- analysts expect the company to post 4.2% sales growth and 24.4% earnings growth in fiscal 2016.

The Carnival Sunshine. Source: Carnival.

Why Carnival could fall
During last quarter's conference call, Carnival CEO Arnold Donald said that he was "very, very positive on the China market." But if China's economic growth, which recently hit its lowest level in 25 years, keeps slumping, market demand for luxury cruises will likely take a hit. The recent stock market turmoil might reduce the middle class' spending power, while the sliding RMB could impact its regional earnings. In Carnival's other key markets, declines in the Euro, pound, Australian dollar, and Canadian dollar against the U.S. dollar could exacerbate that pain.

CFO David Bernstein noted that while booking volumes remained strong, Carnival's expectations for 2016 were "tempered by ongoing geopolitical and macroeconomic uncertainties, particularly for the European markets and destinations." Bernstein noted that even though industry capacity is expected to rise 33% annually in Asia and 19% in Australia, the company remained "cautious" in both regions. Simply put, if more countries enter recessions in 2016, Carnival's global business will decline.

Carnival also has more trouble growing ticket sales than Royal Caribbean. Last quarter, Carnival's ticket sales slipped 2.4% annually to $3.63 billion, partially due to currency impacts. By comparison, Royal Caribbean's ticket sales rose 4.9% annually to $1.87 billion last quarter. Onboard revenues rose at both companies, but Carnival's total revenues still slipped 1.3% as Royal Caribbean's rose 5.6%. Meanwhile, both Carnival and Royal Caribbean's bottom lines remain vulnerable to unexpected increases in fuel costs. If OPEC actions, regional conflicts, or other factors cause oil prices to rise, both companies will lose that major bottom line tailwind.

Carnival's "best" year happened over a decade ago
As long as oil prices remain low and the world doesn't fall into a recession, Carnival stock should hold up well throughout 2016, but it will unlikely be the company's "best" year yet. That title belongs to 2003, when its merger with P&O Princess Cruises created the first global cruise company and boosted its annual revenues by 73%. Nonetheless, investors looking for fairly dependable, income generating plays on low oil prices should take a closer look at Carnival and Royal Caribbean.