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Is Royal Caribbean (RCL) More Attractive Than Carnival (CCL)?
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The cruise and travel space primarily thrives on consumer spending. Demand for cruises is relatively elastic as any significant change in the general market often tampers with consumers’ preference for such services.
Notably, the near-term fate of the overall leisure space reflects an increasing anxiety among consumers, regarding Trump’s tariff policy. Per the Bureau of Economic Analysis, disposable personal income increased 4.5% in the second quarter of 2018, down from the 7% increase in the first quarter.
However, the Federal Reserve’s latest forecast calls for economic growth of 2.8% for 2018, which is likely to support growth for the leisure industry. Moreover, according to Cruise Lines International Association (CLIA), the cruise industry is expected to continue growing significantly in 2018, with 27.2 million passengers likely to cruise. This figure is 5.4% higher than the one projected for 2017.
Leading U.S. cruise companies — Carnival Corporation (CCL - Free Report) and Royal Caribbean Cruises Ltd. (RCL - Free Report) — are expected to continue to gain, backed by an increasing demand for cruises and solid booking trends. Per VGM Score that identifies the most attractive value, growth and momentum characteristics, both the companies have a Score of A, indicating that these are most likely to outperform the peers in the industry.
With both 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 rallied 4.4% in the past three months, Royal Caribbean gained 10.9%, outpacing its peers. However, Carnival’s shares have lost 3.5% in the same time period.
3-Month Price Performance
Meanwhile, both Royal Caribbean and Carnival have beaten earnings in each of the last four quarters. While Royal Caribbean has an average positive earnings surprise of 10.6%, Carnival’s average is 16.1%. For the current year, Royal Caribbean’s earnings are expected to grow 18.2%, higher than Carnival’s projected EPS growth of 11%.
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 11.57 while that of Carnival is 8.16. With the industry average being 7.70x, Carnival 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, implying a higher proportion of the company’s assets over the long term. Carnival’s debt ratio is 23.4 compared with the industry’s 28.6 and Royal Caribbean’s 35.4.
Return on Equity & Net Margin
Carnival delivered a return on equity (ROE) of 12.3% in the trailing 12 months compared with the industry’s increase of 7.8%. Royal Caribbean’s ROE is 16.5%. This indicates that Royal Caribbean reinvests more efficiently than Carnival.
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 11.3% while that of Royal Caribbean’s and Carnival’s is 19.3% and 15.4%, respectively.
Final Thoughts
Notably, Royal Caribbean holds an edge over Carnival when it comes to share price movement, return on equity, net profit margin and projected EPS growth for the current fiscal. However, Carnival’s cheaper valuation, lower debt and impressive earnings history remain encouraging. Please take a look at the following table to compare the two cruise giants on your own.
SeaWorld Entertainment and Vail Resorts’ earnings for the current year are expected to increase 104.8% and 72.6%, respectively.
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Is Royal Caribbean (RCL) More Attractive Than Carnival (CCL)?
The cruise and travel space primarily thrives on consumer spending. Demand for cruises is relatively elastic as any significant change in the general market often tampers with consumers’ preference for such services.
Notably, the near-term fate of the overall leisure space reflects an increasing anxiety among consumers, regarding Trump’s tariff policy. Per the Bureau of Economic Analysis, disposable personal income increased 4.5% in the second quarter of 2018, down from the 7% increase in the first quarter.
However, the Federal Reserve’s latest forecast calls for economic growth of 2.8% for 2018, which is likely to support growth for the leisure industry. Moreover, according to Cruise Lines International Association (CLIA), the cruise industry is expected to continue growing significantly in 2018, with 27.2 million passengers likely to cruise. This figure is 5.4% higher than the one projected for 2017.
Leading U.S. cruise companies — Carnival Corporation (CCL - Free Report) and Royal Caribbean Cruises Ltd. (RCL - Free Report) — are expected to continue to gain, backed by an increasing demand for cruises and solid booking trends. Per VGM Score that identifies the most attractive value, growth and momentum characteristics, both the companies have a Score of A, indicating that these are most likely to outperform the peers in the industry.
With both 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 rallied 4.4% in the past three months, Royal Caribbean gained 10.9%, outpacing its peers. However, Carnival’s shares have lost 3.5% in the same time period.
3-Month Price Performance
Meanwhile, both Royal Caribbean and Carnival have beaten earnings in each of the last four quarters. While Royal Caribbean has an average positive earnings surprise of 10.6%, Carnival’s average is 16.1%. For the current year, Royal Caribbean’s earnings are expected to grow 18.2%, higher than Carnival’s projected EPS growth of 11%.
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 11.57 while that of Carnival is 8.16. With the industry average being 7.70x, Carnival 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, implying a higher proportion of the company’s assets over the long term. Carnival’s debt ratio is 23.4 compared with the industry’s 28.6 and Royal Caribbean’s 35.4.
Return on Equity & Net Margin
Carnival delivered a return on equity (ROE) of 12.3% in the trailing 12 months compared with the industry’s increase of 7.8%. Royal Caribbean’s ROE is 16.5%. This indicates that Royal Caribbean reinvests more efficiently than Carnival.
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 11.3% while that of Royal Caribbean’s and Carnival’s is 19.3% and 15.4%, respectively.
Final Thoughts
Notably, Royal Caribbean holds an edge over Carnival when it comes to share price movement, return on equity, net profit margin and projected EPS growth for the current fiscal. However, Carnival’s cheaper valuation, lower debt and impressive earnings history 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 and Vail Resorts (MTN - Free Report) , each 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 Vail Resorts’ earnings for the current year are expected to increase 104.8% and 72.6%, respectively.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>