The travel industry has continued a strong recovery this year despite macroeconomic headwinds. With cruise stocks still trading well off their pre-pandemic highs, this is a good 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, from the year to date. Let’s look at the case for owning both stocks before deciding which is the better choice for long-term investors.
Why you should buy shares of Norwegian Cruise Lines
The cruise industry is fairly easy to understand. Companies invest in new ships to expand, control costs and differentiate the experience enough to keep prices and occupancy rates up. It is a delicate balancing act as pricing too high can reduce utilization levels while pricing too low to gain market share can destroy profitability and drive down the stock price.
Right now, Norwegian Cruise Lines and Carnival are in a good position for pricing as there is tremendous pent-up demand for cruises. Norway’s bookings for fiscal year 2023 are trending toward record levels, and that’s up roughly 16% from pre-pandemic capacity.
Both companies delivered very similar revenue performance over the past three years — a steep decline during travel restrictions followed by a steady recovery in growth over the past year.
Data from YCharts.
In the second quarter, Norway increased revenue by 127% compared to the previous quarter. Occupancy rates were 65%, up 17 points during the first quarter. Management is focused on building ownership with the discipline to maintain industry-leading prices with the goal of reaching historic levels by the second quarter of 2023.
There are several important advantages for Norwegian cruise lines. It operates three brands: Norwegian (18 ships), Oceania (six ships) and Regent (five ships). The Oceania and Regent brands provide valuable exposure to the luxury side of the market. That 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 luxury berths in its fleet compared to Carnival Corp.
Another reason to like Norwegian is that it generates 78% of its revenue from the US market, while Carnival has more exposure to international markets such as Europe, Australia and Asia. Due to its greater international exposure, Carnival is more exposed to the negative impact on revenues from the appreciation of the US dollar in the near term.
Also, because of Norway’s smaller fleet, it has more opportunities to expand into untapped markets. Management plans to increase the fleet by 40% over the next five years with state-of-the-art vessels. As a result, Norwegian can better differentiate its brands and price accordingly to deliver higher revenues and profits.
Why you should buy Carnival shares
Carnival is one of the largest cruise lines in the world and controls the budget end of the price spectrum. It had a fleet of 91 ships as of November 30, 2021. Popular brands include Carnival Cruise Line, Princess Cruises, Holland America Line, Costa Cruises, Seabourn and Cunard.
In the third quarter, revenues were up 80% compared to the previous quarter, with utilization rates nearing 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 valuing the two stocks quite differently. On a price-to-sales basis, Norwegian trades at 2.54 times trailing-12-month earnings, while Carnival trades at less than 1. Carnival may offer better upside due to its lower valuation, but could not offer the same long-term growth prospects as its smaller rival.
Data from 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 that time. While this will limit its revenue growth potential compared to Norway, management expects that the lack of investment in new vessels will allow for less capital expenditure and, therefore, increase free cash flow.
Carnival is also looking to optimize its fleet by shedding smaller, less efficient ships, which will help boost revenue and lower costs to improve profit margins.
Norwegian Cruise Lines is the best buy
Overall, I would buy shares of Norwegian Cruise Lines because of its ability to expand its small fleet to expand at a faster rate than other cruise stocks. Over time, faster revenue and earnings growth will naturally lead to a better performing stock.
Additionally, Norwegian’s fleet expansion into the luxury market can serve a broad customer demographic. This potentially makes Norway a more recession-proof business.
