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Royal Caribbean vs Norwegian Cruise: Which is Worth Boarding?

Zacks Equity Research

The leisure and travel industry has been seeing increased demand as travel has become a dire need in the fast-paced lives. The cruise industry is particularly gaining from this surge in demand as vacationers are seeking experiential travels, where they look for experiences that go beyond sightseeing.

Per the Cruise Lines International Association, the cruise industry is likely to grow throughout 2019, with 30 million cruisers, up 6% from 28.2 million in 2018. Also, the industry is poised to gain from a healthy labor market, rising wages and growing disposable income. Per the Bureau of Economic Analysis’ "advance" estimate, gross domestic product (GDP) for the United States increased at an annual rate of 3.2% in the first quarter of 2019. This uptrend is likely to continue in the near term as well, aiding the leisure service space.

Leading U.S. cruise companies — Norwegian Cruise Line Holdings Ltd. NCLH and Royal Caribbean Cruises Ltd. RCL — are expected to continue to gain, backed by increasing demand for cruises and solid booking trends. Per VGM Score, which identifies the most attractive value, growth and momentum characteristics, Norwegian Cruise has a score of A while Royal Caribbean has a Score of B. This indicates that the companies are most likely to outperform the peers in the industry.

With the companies currently carrying a Zacks Rank #3 (Hold), let’s find out which is placed better with respect to other parameters.

Price Performance, Earnings History & Growth Projection

While the Zacks Leisure and Recreation Services Industry has lost 1.5% in the past year, Royal Caribbean gained 14.5%, outpacing its peers. Also, Norwegian Cruise’s shares have gained 5.1% in the same period.

One Year Price Performance

 

 

Meanwhile, Royal Caribbean and Norwegian Cruise beat earnings in each of the last four quarters. While Royal Caribbean has an average positive earnings surprise of 8.8%, Norwegian Cruise’s average is 11.2%. For the current year, Royal Caribbean’s earnings are expected to grow 11.3%, slightly lower than Norwegian Cruise’s projected EPS growth of 11.8%.

Valuation & Debt Ratio

Since the cruise stocks are debt-laden, it makes sense to value those based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric considers not just its equity but also the level of debt on a company’s balance sheet.

For capital-intensive companies, the EV/EBITDA is a better valuation metric because it is unaffected by the changing capital structures and ignores the effects of non-cash expenses on a company’s value. The trailing 12-month EV/EBITDA ratio of Royal Caribbean is 11.22 while that of Norwegian Cruise’s is 9.29. With the industry average being 7.48x, Norwegian Cruise has an edge over Royal Caribbean.

Since the sector has high financial leverage, the debt-to-asset ratio comes into the picture. This measures the ability of a company to meet its long-term debt. Cruise stocks should ideally have lower debt ratios, which shall imply a higher proportion of the company’s assets over the long term. Norwegian Cruise’s debt ratio is 41.5 compared with the industry’s 32 and Royal Caribbean’s 31.9.

Return on Equity & Net Margin

Norwegian Cruise delivered a return on equity (ROE) of 19.4% in the trailing 12 months compared with the industry’s increase of 7.5%. Royal Caribbean’s ROE is 17.2%. This indicates that Royal Caribbean reinvests less efficiently than Norwegian Cruise.

Traditionally, gross margin for the hospitality companies is comparatively higher as the majority of the expenses come from the cost of operations. However, the sector’s profits are not very high, which is evident from the net profit margin or net margin. The industry’s trailing 12-month net margin is 9.3% while that of Royal Caribbean’s and Norwegian Cruise’s is 19.6% and 15.7%, respectively.

Our Take

Notably, Royal Caribbean holds an edge over Norwegian Cruise when it comes to share price movement, debt ratio and net profit margin. However, Norwegian Cruise’s cheaper valuation, impressive earnings history and higher return on equity remain encouraging. Please take a look at the following table to compare the two cruise giants on your own.

 

 

Source: https://www.zacks.com

Stocks to Consider

Two better-ranked stocks in the leisure space are SeaWorld Entertainment SEAS and Manchester United MANU, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SeaWorld Entertainment and Manchester United’s earnings for the current year are expected to increase 169.2% and 42.9%, respectively.

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Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
 
SeaWorld Entertainment, Inc. (SEAS) : Free Stock Analysis Report
 
Norwegian Cruise Line Holdings Ltd. (NCLH) : Free Stock Analysis Report
 
Manchester United Ltd. (MANU) : Free Stock Analysis Report
 
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