On course with cruise ship stocks

Cast off! That is the current spirit within the cruise industry. Business is going well and an end to the upswing is not in sight. More than two years after the accident of the cruise ship Costa Concordia, when 32 people died, the spirit of optimism within the sector can also be felt on the job market. According to reports 25,000 employees are needed by 2016 to staff new cruise ships alone. Until then, worldwide, 26 new cruise ships are due to be launched. Even the British billionaire Richard Branson wants to get involved, by investing $1.7 billion to create his own cruise company.  

While generally the barriers for market entry for newcomers are quite high, investors with deep pockets, like Branson, nevertheless may feel attracted by the average profit per guest day. Even though this number has fallen in recent years, it is still higher than the average figures achieved by airlines, tour operators or hotels. 


Demand and capacity are growing  

Given the growing capacity in the cruise sector, prudent investors nevertheless will ask themselves, what will this mean for the future profit margins? At present, this question cannot be answered definitively but, according to Morgan Stanley, earlier expansion phases have been more favorable than harmful for the business.  

That can probably be explained by the fact that better quality ships not only attract more guests but also charge higher prices.  

Thomas Wybierek, shipping-sector-analyst at the German bank NORD/LB is also optimistic in that respect. “At present we do not see any margin pressure. It is more the opposite instead. The investments put into new ships could now start to pay off, since important regions like the U.S. and Europe see a slight economic recovery and consumption expenditures are growing. With rising utilization rates, the companies can ask for higher fares for the travel packages. Together with the absence of negative headlines within the sector, the trend towards growing passenger numbers could continue.” 

To assess the current shape of the industry, Wybierek attaches particular importance to the development of the passenger numbers. Therefore, the forecast of industry data provider Cruise Market Watch is encouraging, according to which the annual figure for passengers transported worldwide is going to grow by 3 percent to 21.6 million in 2014. In addition, a lot of untouched potential is seen in Asia.  

Currently, only 6.7 percent of all cruise passengers come from that region. But sector representatives want this to change.  

A first step in that direction is the decision of Royal Caribbean to station the new huge cruise ship Quantum of the Seas in Shanghai. The 348 meters long and 41.4 meters wide ship, with a capacity of 4,180 passengers, is scheduled to travel to South Korea and Japan from there. 

Carnival recently announced it will deliver another ship, named Costa Serena, for the Chinese market. With a passenger market share of 47.7 percent and a share of the global sales of 41.8 percent, Carnival is by far the market leader. Royal Caribbean is the number two in the sector, with a market share of 22.7 percent of passengers and 21.8 percent of sales, while Norwegian Cruise Line is the number three in the industry with respective market share figures of 9 percent and 8.2 percent. But Norwegian has the youngest fleet, with an average age of 7.4 years, compared to an average age for Royal Caribbean of 10.9 years and 12 years for Carnival.  

Since Norwegian, which is a part of the Asian conglomerate Genting, went public in 2013, all three leading industry members have been listed on the stock market. 


Carnival has the highest valuation  

If size was the only factor on the stock market, the Anglo-American company Carnival would clearly be the favorite. But its stock price has been trending sideways for more than four years.  

Both Norwegian and Royal Caribbean have performed clearly better than Carnival since 2013. This development can also be explained by a glance at the balance sheets, revealing an operating profit margin for Carnival, which has fallen behind those of the two big competitors. Against a quick shift of investor preference in favor of Carnival speaks also the valuation on a price-earnings-basis.  

According to the estimates by Morgan Stanley, Carnival has a price-earnings-ratio of 16.6 based on the earnings estimations for 2015. Royal Caribbean, in turn, has a P/E ratio of 14 and Norwegian of 12. 

This comparison turns out to benefit Norwegian and, backed up by Getinge, this company could have a decisive advantage in the battle for market share in the growing Asian market.  

However, ongoing sales of some shareholders, who do not want to be involved any more after the IPO, still weigh on the Norwegian stock. But this load factor should subside soon. In the medium term, Royal Caribbean also has good chances of further gains in the stock price. At least, this should be the case if the company continues successfully to cut costs and further progress is made in reducing the debt burden. 

In conclusion, the industry has some charm from an investor point of view. If the worldwide travel boom continues, especially Norwegian and Royal Caribbean could lock in further stock price gains in a range of around 10 percent per year.  

Even though things are going well currently, the risks should not be forgotten. The sector depends a lot on the willingness of the consumers to spend money and on the health of the global economy. This also applies to fuel prices. In addition, there are event risks like accidents. To protect the portfolio against such risks, positions should be hedged with stop-loss-limits.