3 Cheap Cruise Stocks to Help Your Portfolio Sail to the Green

Two of these stocks are significantly undervalued, even as the S&P Composite 1500 Hotels, Resorts & Cruise Lines Index has clocked a 30% year-to-date gain.

Vikram Barhat 21 June, 2023 | 1:29AM
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 Cruise Ships

Summer is here, and so is the annual tradition of families planning their annual getaway to enjoy some rest and relaxation, away from their daily routine. A significant number of these vacationers will be embarking on oceanic holidays. While ocean cruising has traditionally been popular among retirees, it is now increasingly attracting a younger cohort of travellers seeking once-in-a-lifetime experiences.

Thus, cruise passenger volume is forecasted to skyrocket to 31.5 million passengers in 2023, a whopping 106% of 2019 levels, per a recent report from the Cruise Lines International Association (CLIA). It’s no surprise that the S&P Composite 1500 Hotels, Resorts & Cruise Lines Index has clocked a 30% gain, twice as much as the S&P 500’s 15% return, for the year to date, as of June 19, 2023.

As consumers rush to travel, the following cruise operators are well positioned to benefit. In addition to a broader upswing in travel, these operators each boast a large slice of the cruise market with state-of-the-art fleet, loyal customers, innovative itineraries, and ever-expanding geographic footprint.

The world's third-largest cruise company by berths, Norwegian Cruise Line (NCLH) operates 30 ships across three brands (Norwegian, Oceania, and Regent Seven Seas), offering both freestyle and luxury cruising. The operator, which has been increasing capacity faster than its peers, sailed to around 500 global destinations before the pandemic.

With an estimated occupancy rate of 100% in the first quarter and anticipated price increases throughout 2023 compared to 2019, Norwegian's performance this year shows a positive trajectory.

“In fact, given the visibility provided by the 62% of 2023 itineraries that are already booked, the US$2.7 billion in advance ticket sales on the balance sheet (30% higher than 2019), and a 2023 cumulative booked position that is ahead of 2019 levels at higher pricing, we’d contend that consumers’ appetite for travel is still robust,” says a Morningstar equity report.

Given the momentum and the introduction of three new ships scheduled for 2023, which are expected to attract higher prices, Norwegian is poised to meet its projected yield growth of 4.75%-6.25% as compared to 2019 levels, the report adds.

While Norwegian’s freestyle offering has to compete with land-based vacations and for wallet share, it will not be challenging to “capture the historical levels of spending over the near term, given the value proposition the [operator’s] cruise product offers,” assures Morningstar equity analyst, Jaime Katz, who puts the stock’s fair value at US$27.

Royal Caribbean (RCL) is the world's second-largest cruise company, operating 64 ships across five global and partner brands, including Royal Caribbean International, Celebrity Cruises, and Silversea. The company also has a 50% stake in a joint venture that operates Germany-based TUI Cruises and Hapag-Lloyd Cruises.

Royal is enjoying higher than expected demand this year, surpassing historical trends and at higher rates. “With travel constraints and coronavirus hesitancy largely in the rearview mirror, consumer behaviour around travel and social distancing have returned to normal for Royal Caribbean, leading to positive operating cash flow and EBITDA at the business,” says a Morningstar equity report.

With redeployment of the fleet completed, booking patterns have returned to a historical pace, the report notes.

The recent outperformance is attributed to better close-in bookings, higher prices, strong onboard spending, and solid expense management, says Katz, who recently raised the stock’s fair value to US$94 from US$86, prompted by strong first-quarter results.

As well, the company clocked US$2.9 billion in sales and an adjusted EPS loss of just US$0.23, significantly better than what was forecast. “All signs point to interest in the travel experience, with spending on services over goods remaining persistent, which supports Royal’s lift of its 2023 as-reported pricing growth outlook to 6.25%-7.25%, from 2.5%-5.5%,” Katz assets.

The advance ticket sales worth US$5.3 billion offers ample evidence that cruise demand is holding up well, she notes.

The largest global cruise company, Carnival (CCL) owns 90 ships across nine brands including Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn (North America); P&O Cruises and Cunard Line (U.K.); Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia.

Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon.

The operator saw demand for its cruises roar back this year from different consumer types, many of them first-time cruisers. Industry analysts say growing demand is no longer just about a post-pandemic recovery.

“The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity,” says a Morningstar equity report.

Moreover, the repositioning and deployment of ships over the past few years to faster-growing and underrepresented regions like Asia-Pacific has helped balance the supply in high-capacity regions including the Caribbean and Mediterranean, aiding pricing. 

When consumers resumed cruising in the summer of 2021, Carnival responded quickly by deploying 90 ships with eight of the company's nine brands sailing their entire fleets, points out Katz, who pegs the stock’s fair value at US$22, but stresses higher cost debt service has delayed a return to profitability.

“Eight of the nine brands are fully deployed, and as such, passenger capacity should approach 2019 levels again in 2023,” she notes. 


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Carnival Corp15.95 USD1.66Rating
Norwegian Cruise Line Holdings Ltd16.97 USD0.35Rating
Royal Caribbean Group151.48 USD1.58Rating

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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