Cruise stocks a light on horizon for investors seeking diversification

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The Carnival Radiance cruise ship at the Avalon, California, harbor on May 19, 2023.

Aaronp/bauer-griffin | Gc Images | Getty Images

The NASDAQ may have hit a bit of a blip in late June when it absorbed losses over six consecutive trading sessions at one point. But it rallied during the final days of the month, finishing comfortably in the black and it’s up over 30% through the first half of the year.

Only a handful of companies are responsible for most of the index’s gains thus far, including the likes of Nvidia (NASDAQ: NVDA), Meta (NASDAQ: META) and Tesla (NASDAQ: TSLA). While concentrations within indexes like this are hardly unusual, they are often a bearish omen. The good news is market breadth improved beginning in late May and leadership has expanded to include cyclical sectors and industries.

Still, these firms have become so expensive relative to the broader market that some analysts have recently begun downgrading them. Naturally, that may prompt some investors to look elsewhere if some of those names lose momentum.

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One place to start could be cruise companies: Carnival Cruise Line (NYSE: CCL), Norwegian Cruise Line (NYSE: NCLH) and Royal Caribbean International (NYSE: RCL). Perhaps no other industry took it on the chin as hard during the pandemic, which halted sailings for months.

Even as these companies have bounced back from the lowest of the lows, they remain unprofitable. Still, the industry has several things going in its favor currently. Consider the following:

  • Relative to services, consumers are still spending about 20% more on goods than they did pre-pandemic. That gap, however, is closing, and according to Delta Air Lines (NYSE: DAL), the trend could have legs for a couple more years. On a recent call with analysts, management said that the shift from goods to services was “only in the middle innings.”
  • Before the pandemic, cruises were about 20% less expensive than land-based vacations (i.e., reserving a hotel near a beach somewhere). Now, they are about 40% cheaper, providing cost-conscious travelers an attractive alternative.
  • All three companies have cited a pronounced uptick in “new-to-cruise” customers. Previously, most of the demand came from longtime cruisegoers.
  • Fuel prices — one of the biggest expenses for any cruise line — have been trending down since last summer. Crude is off nearly 10% this year and has toppled by more than a third from its June 2022 peak. All this helps margins.
  • Cruise companies were forced to set aside cash as a risk buffer for credit card operators during the pandemic. Carnival put away about $1.7 billion, while Norwegian reserved $577 million. Those restricted cash volumes could soon come free, allowing both companies (Caribbean’s restricted cash is negligible) to put it back on their balance sheets, which should translate into added equity values — if they use that money to pay down debts.

Carnival seems best bet for growth

Strong consumer demand for cruises is regenerating cash flow, says UBS' Robin Farley

Carnival is likely best positioned to take advantage of these trends among the three. Again, its balance sheet could soon get a huge boost, while management seems intent on returning profit margins to the prior peak set in 2016.

Doing that would go a long way to achieving pre-pandemic multiples, which were about nine times forward-year earnings before interest, taxes, depreciation and amortization (EBITDA), and place the company on the path toward hitting the $23 mark next year, a healthy jump from where it trades today.

With some of the most popular stocks possibly riding too high, it could be time to drift to other portions of the market that have more room to run. Given some of the tailwinds — not to mention the enduring strength of the American consumer — riding the cruise lines may be the place to be this summer.  

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