Cruise Ship Stocks: Sailing To A Profit

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Yesterday, I wrote a piece explaining that the tendency of traders to react to the short-term effects of news can at times create opportunities for investors with longer time horizons. The example I used then was Expedia (EXPE), but there are other stocks that have also lost ground on news recently that, barring any other outside shock, are bound to recover and resume their upward trends.

Most notable among them are the cruise line stocks, and in particular Royal Caribbean (RCL) and Carnival (CCL)

As a succession of hurricanes have ravaged the Caribbean, all the major cruise lines have, understandably in terms of the short-term effect of the hurricanes, lost ground. This was forecast to be a particularly severe hurricane season and so it has turned out, but major storms are nothing new in the Caribbean and yet the cruise business continues to grow.

Cruising has been one of the biggest beneficiaries of the trend among Millennials to spend their hard-earned money on travel and experiences rather than on more traditional consumer items such as clothes and electronics. The growth in the market is not just attributable to Millennials, however, as cruise revenue has grown at an average of over seven percent a year since as far back as 1980.

Despite that, however you look at it, there is still a lot more to come.

For one thing, the major international cruise lines have only recently begun to market aggressively in in China, the world’s largest potential market. As that country’s 1.3 billion people gain access to increasing disposable income, they are showing the same trend towards experience purchasing as the younger crowd here in the west. The potential of the market is obvious, and operators have been adding to fleets for years as the number of travelers from China, indeed from Asia more generally, increases rapidly.

Despite that growth though, well over half of the cruises around the world are still booked by North Americans, so if that were a saturated market you could argue that growth was about to stall. The data, however, suggest that saturation point in the U.S. market is a long way off; according to statisticbrain.com, for example, less than twenty percent of Americans have taken a cruise. In part, the reason for that is cost, or at least perception of cost.

Cruising was until quite recently seen as the ultimate luxury vacation for the wealthy, but the lower cost options offered by the likes of Royal Caribbean and Carnival are gradually changing that. Still, according to the same data set, 86% of cruisers are still college graduates, and their average household earnings are over $100,000.

Crucially, that trend towards affordability is showing no signs of putting off existing cruise fans, with 92% saying they will probably or definitely book a cruise as a next vacation. (Source: CLIA 2017 Report)

As always, some don’t believe the evidence. Anecdotally you may hear that cruises are doomed every time there is an outbreak of a disease on board a ship, but I would always choose hard evidence over anecdote, and the numbers show continued growth. Right now especially, you may also hear that climate change is going to increase the frequency and strength of storms which will limit cruising.

There may be some truth to that at some point in the future, but to claim that this season is proof of that happening now is the same as saying that the planet is not warming because it snows one day where you live. Weather and climate are different things, whichever side of the debate you are on.

The long-term bases case for investing in cruise lines is, as you can see, strong. International and domestic expansion are taking place, but penetration is not yet that high, and existing customers remain loyal. The question for investors, then, is which stock or stocks to best play the trends outlined above.

I would suggest the two mentioned above, RCL and CCL. They are two of the largest firms, and are consolidating their positions by their appeal to the two areas of growth outlined above. They are the two leaders in marketing to Asia, and are perceived here in the U.S. as being at the value end of the cruising spectrum, broadening their domestic appeal.

The parade of storms in the Atlantic Ocean and the Caribbean Sea have been shocking in many ways. They have wreaked havoc, and in financial terms will undoubtedly affect the profits of cruise operators this quarter. That doesn’t mean however that they will derail the phenomenal growth in the cruise business that we have seen over the last twenty years or so, and long-term investors should be loading up on RCL and CCL while they are cheap.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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