Anytime a stock is down due to circumstances largely outside of a company's control, like a global pandemic, it's worth examining whether it could be a possible bounce-back candidate. Cruise stocks were among the hardest hit, with voyages coming to a standstill and companies taking on significant debt to stay afloat.
Now that business is back to normal, let's check in with two prominent industry players, Carnival Corporation & plc (NYSE: CCL) and Norwegian Cruise Line (NYSE: NCLH), which are down roughly 60% from pre-pandemic highs, to see which stock has the better chance for a turnaround.
Cruise revenue is back, but profits lag
Before examining each company's revenue and net income, it's worth noting that Carnival is a much larger cruise operator than Norwegian, with a market capitalization of $21.7 billion compared to Norwegian's $7.9 billion.
Over Carnival's trailing 12 months, the company generated $23.4 billion in revenue, representing a 14% increase from the same period five years prior. CEO Jeff Weinstein claims the renewed demand isn't a fluke, stating on the company's most recent earnings call, "This is not pent-up demand, it is the compounding effect of building increased consideration in our cruise brands over time and improvement in our yield management techniques to translate that demand into higher ticket price."
Similarly, Norwegian has set sales records over its trailing 12 months, with $9.1 billion, equating to a 43% improvement from the same 12-month period five years prior. Norwegian CEO Harry Sommer echoed Weinstein's sentiment on consumer demand in its latest earnings call, specifically noting that "robust demand" for cruises has led to record results and record-breaking advanced ticket sales.
As for the bottom line, both companies' profitability has become sustainable once again after bottoming out in 2021.
Over the trailing 12 months for each company, Carnival produced $904 million in net income compared to Norwegian's $420 million. Given Carnival's revenue is more than double that of Norwegian, it makes sense that Carnival is more profitable. However, Norwegian has a better operating margin -- the percentage of revenue a company keeps after accounting for the cost of goods sold and operating expenses -- at 13.3% compared to Carnival's 12.1%. Notably, both companies' operating margins are still down more than 25% compared to pre-pandemic levels.
CCL Revenue (TTM) data by YCharts
Getting out of the doldrums
The cruise industry naturally takes on debt because of the high cost of ships, but the pandemic exacerbated that debt.
Before 2020, Carnival had approximately $11 billion in net debt, which steadily increased until its peak of $30.5 billion at the end of its fiscal year 2022. The good news is that the company has been able to pay down its debt -- albeit slowly -- to $27.7 billion as of its most recent earnings report.
The bad news is that Carnival paid $1.4 billion in interest expense over the trailing 12 months, and its debt isn't "investment grade," meaning any further debt or refinancing could lead to higher rates and servicing costs. Carnival's management is taking proactive measures to secure its balance sheet, like prepaying its higher interest rate debt to reduce interest expense.
Comparatively, Norwegian's cash position followed a similar trajectory, with $6.6 billion in net debt prior to 2020, nearly doubling to $12.8 billion as of Q2 2024. Norwegian's net debt is only down 6% off its high compared to Carnival's 9.3%, but the company eliminated its highest-interest debt in March and received an upgrade on its debt ratings. Similarly to Carnival, Norwegian's debt is still considered non-investment grade. Over the trailing 12 months, Norweigan paid $775.2 million in interest expense, 63% lower than its peak, whereas Carnival's interest expense remains largely unchanged despite its net debt improvement.
CCL Net Total Long Term Debt (Quarterly) data by YCharts
Is Carnival Cruise Line or Norwegian Cruise Line the better stock to buy?
These two companies, facing similar challenges, will need to continue to prioritize debt to stabilize their balance sheet before shares can reach pre-pandemic levels. While it may take time, each has shown promise for a possible recovery due to record revenue and reaching profitability again. But, if you were to choose just one stock to buy, it's important to consider valuation.
Using the forward price-to-earnings (P/E) metric, which compares a stock price to its expected earnings over the next 12 months, investors can compare each stock's valuation against each other to determine which one provides a better buying opportunity.
Notably, Carnival and Norwegian recently revised net income forecasts upward, meaning both management teams expect a better earnings outlook than previous guidance. As a result, Carnival and Norwegian trade at 14 and 11.6 times forward earnings, respectively. Not only is Norwegian's forward P/E ratio cheaper than Carnival's, but it's also 42.2% lower than a year ago. Comparatively, Carnival's forward P/E ratio is 9.1% higher than a year ago.
While cruise operators may not be a compelling choice for investors weary of debt levels, the industry turnaround is in motion. Norwegian appears to be the better choice for investors willing to take an outsized risk, as it has a cheaper valuation and more manageable debt than Carnival.
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Collin Brantmeyer has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
