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The travel industry has continued a strong recovery this year despite the macroeconomic headwinds. With cruise stocks still trading well off their pre-pandemic highs, this is the right time to look for bargains that can outperform the broader market.
Norwegian Cruise Line Holdings (NCLH 3.40%) and Carnival Corporation (CCL 4.87%) are two leaders that look attractive after falling 28% and 59%, respectively, year to date. Let’s look at the case for owning both stocks before deciding which one is the best pick for long-term investors.
The cruise industry is fairly easy to understand. Companies invest in new ships to expand, control costs, and differentiate the experience enough to keep pricing and occupancy rates up. It’s a delicate balancing act since pricing too high can lower occupancy levels while pricing too low to win market share can destroy profitability and sink the stock price.
Right now, Norwegian Cruise Lines and Carnival are in a good position on pricing since there is tremendous pent-up demand for travel. Norwegian’s bookings for fiscal 2023 are trending toward record levels, and that’s with capacity up approximately 16% from before the pandemic.
Both companies delivered very similar revenue performance over the last three years — a major dip during the travel restrictions followed by a steady recovery in growth over the last year.
Data by YCharts.
In the second quarter, Norwegian grew revenue by 127% over the previous quarter. Occupancy rates were 65%, up 17 points over the first quarter. Management is focused on building occupancy with the discipline to maintain industry-leading pricing with the goal of reaching historical levels by the second quarter of 2023.
There are a few important advantages for Norwegian Cruise Lines. It operates three brands: Norwegian (18 vessels), Oceania (six vessels), and Regent (five vessels). The Oceania and Regent brands provide valuable exposure to the luxury side of the market. This puts the company in a better position to expand margins from premium pricing, much more so than Carnival, given that Norwegian has three times the number of upscale berths across its fleet compared to Carnival Corp.
Another reason to like Norwegian is that it generates 78% of its revenue from the U.S. market, while Carnival has more exposure to international markets, such as Europe, Australia, and Asia. Because of the greater international exposure, Carnival is more exposed to the negative impact on revenue from a rising U.S. dollar in the near term.
Also, because of Norwegian’s smaller fleet, it has more opportunities to expand in under-penetrated markets. Management plans to increase the fleet by 40% over the next five years with state-of-the-art ships. As a result, Norwegian can better differentiate its brands and price accordingly to deliver higher revenues and profits.
Carnival is one of the largest cruise companies in the world and controls the budget end of the price spectrum. It had a fleet of 91 ships as of Nov. 30, 2021. Notable brands include Carnival Cruise Line, Princess Cruises, Holland America Line, Costa Cruises, Seabourn, and Cunard.
In the third quarter, revenue grew 80% over the previous quarter, with occupancy rates at nearly 90%.
Like Norwegian, Carnival is emerging from the pandemic with a more efficient cost structure, which should lead to solid profit growth over the next few years. However, the market is pricing the two stocks completely differently. On a price-to-sales basis, Norwegian trades at 2.54 times trailing-12-month revenue, while Carnival trades at less than 1. Carnival may offer greater upside due to its lower valuation, but it might not offer the same long-term growth prospects as its smaller rival.
Data by YCharts.
Management has two new ships on order for 2024 and one in 2025. Carnival is not planning any further additions to its fleet beyond then. While this will limit its revenue growth potential compared to Norwegian, management expects the lack of investment in new ships will allow for less capital spending and, therefore, grow free cash flow.
Carnival is also looking to optimize its fleet by removing smaller, less efficient ships, which will assist revenue growth and lower costs to improve profit margin.
Overall, I would buy shares of Norwegian Cruise Lines because of its ability to expand its smallish fleet to expand at a faster rate than other cruise stocks. Over time, faster growth in revenue and profits will naturally lead to a better-performing stock.
Moreover, Norwegian’s fleet expansion in the luxury market can serve a wide demographic of customers. This potentially makes Norwegian a more recession-resilient business.
John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.
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