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Royal Caribbean Cruises Ltd. (RCL), Carnival Corporation (CCL): An Industry On Sale!

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It seems that every time I watch the news I hear about another mishap involving the cruise industry – engine failures, fires, and more leaving passengers stuck in port, not to mention the incident aboard the Carnival Triumph, which is now infamously known as “the cruise from hell.” As a result of this, there has been a growing sense of pessimism in the markets, and cruise ship stocks have dropped considerably over the past several months, down over 20% in some cases. Is this going to be a lingering sentiment that cripples the cruise industry over the long term, or simply a minor bump in the road that creates a nice buying opportunity? Let’s examine some of the fundamentals behind Carnival Corporation (NYSE:CCL), the largest cruise line, and some of its competitors.

Carnival Corporation (NYSE:CCL)

Carnival Corporation (NYSE:CCL)

As mentioned, Carnival Corporation (NYSE:CCL) is the world’s largest cruise line, with about 100 cruise ships under the brand names Carnival, Holland America, Princess, and Seabourn to name a few. This is double the size of its nearest competitor, Royal Caribbean Cruises Ltd. (NYSE:RCL), which operates 41 ships. Cruising, in general, has been growing fairly rapidly over the past decade or so, as consumers see cruises as one of the best values in vacations, and this can be seen by the revenue growth of the two largest cruise companies in the chart below:

Carnival Corporation (NYSE:CCL) plans to take advantage of the growth in the industry by introducing at least two new ships per year through 2016 (three are planned for 2015). In addition, after the recent incidents, the company has placed a renewed emphasis on revamping and renovating existing ships, in order to ensure customers that they are taking every precaution to prevent future incidents.

The Others: Royal Caribbean and Norwegian

As far as publicly-traded cruise ship operators go, there are only three major players. The second largest is Royal Caribbean Cruises, which operates under its own brand name as well as the Celebrity Cruises brand. From the chart above, you can see that Royal Caribbean has grown its revenues similarly to Carnival Corporation (NYSE:CCL), with total sales doubling over the past decade. Other than the unfortunate incidents at sea recently, much of the attention on Royal Caribbean Cruises Ltd. (NYSE:RCL) in recent years has been on their Oasis-class ships, the biggest cruise ships on the market, with capacities of around 5,400.

Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) is the third largest, and the newest to enter the publicly-traded domain, having gone public just this past January. Norwegian prides itself on having the youngest and most up-to-date fleet of ships in the industry, including the much-publicized Norwegian Breakaway, which just entered service April 30 and is based out of New York. Norwegian’s CEO Kevin Sheehan has gone so far as to call the ship a “game-changer” for the entire cruise industry.

The Numbers: Which One is Cheapest Now??

First, let’s look at Carnival, as it would make sense if Carnival was trading at the steepest discount since a disproportionate amount of the recent incidents have occurred on their ships. However, Carnival trades at a surprisingly high valuation of 17.2 times last year’s earnings, and although earnings are expected to drop slightly during the current fiscal year (2014), the consensus calls for growth to $2.30 and $2.84 per share in FYs 2015 and 2016, respectively, which would mean earnings growth of over 50% in the next three years. Carnival does pay a very nice dividend yield of over 3%, which is worthy of consideration, especially if income is one of your goals.

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