The cruise line industry has seen some unprecedented twists and turns over the last few years, but it's started to rebound now that pandemic-related headwinds have lessened. Carnival (CCL 2.66%) and Royal Caribbean (RCL 1.56%) are two of the biggest players in the space, and investors might be wondering which of these companies is the better investment now that trip demand is rebounding.
Read on to see why two Motley Fool contributors have very different takes on the question of whether Carnival or Royal Caribbean is the better buy.
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Resiliency is key
George Budwell: Carnival's management painted a fairly optimistic picture about its ongoing recovery efforts from the COVID-19 pandemic when it reported 2022 second-quarter earnings back in June. During the three-month period, cash from operations turned positive, revenue rose by a healthy 50% from the prior quarter, and booking rates on Carnival's leisure cruises were up substantially quarter over quarter.
Best of all, Carnival was sailing into the busiest part of the year for the industry -- the third quarter. Even so, Carnival's stock is still trading near its pandemic low. The cruise ship's equity, in fact, isn't far removed from its 52-week low right now.
Why are investors not buying into this turnaround story? The culprit behind Carnival's failure to launch, so to speak, on its overall positive Q2 report is the weakening global macroeconomic environment. Inflation is stubbornly high, interest rates are on the rise, and global supply chains are far from peak operating efficiency. In short, Wall Street is concerned that these macroeconomic headwinds will spill over into the leisure cruising industry in the form of lower bookings and shrinking revenues in 2023. Unfortunately, this key risk factor is hard to ignore, given the stark warning signs that the U.S. and European economies are indeed headed for a slowdown.
Does this mean that investors ought to avoid cruise stocks altogether? Quite the contrary. The bottom line is that Carnival is the largest operator in the space, and it has the liquidity necessary ($8.1 billion in cash and cash equivalents at last count) to push through yet another hardship. So, if you're looking for a value stock that could double or triple in value within the next two to three years, Carnival should definitely be on your list. That being said, investors will probably want to slowly build a position in this beaten-down cruise ship stock over the next six to 12 months as the company works through these ongoing challenges.
Royal Caribbean has been less dilutive and has less debt
Keith Noonan: While Royal Caribbean still has a major issue with debt on the heels of pandemic-related challenges, it's taken a much lighter approach than Carnival to selling new shares in order to raise funds.
RCL Shares Outstanding data by YCharts
Both cruise stocks have seen huge sell-offs over the last year, but dilution has been a contributing factor in Carnival posting the worse performance of the two, and I think it remains a key risk factor for investors going forward.
On the other hand, Royal Caribbean has been selling convertible notes and refinancing debt at relatively high interest rates recently, and some of these notes will likely be converted into stock. With revenue for both companies still well below pre-pandemic levels, I think Royal Caribbean's financial positioning and corporate governance have looked stronger than Carnival's lately. But it's clear that debt, cash flows, and the threat of continued dilution are risks for both cruise stocks.
Royal Caribbean has been increasing revenue per customer and recently posted its best-ever results along those lines. The company's high-end Celebrity and Silversea lines in particular look capable of driving high-margin sales as demand continues to improve. Both Royal Caribbean and Carnival saw cash from operations turn positive in the second quarter, but both posted big losses due to high capital expenditures. There are signs that each business is on the path to recovery, but Royal Caribbean's financial position and greater focus on the high-end market makes me think it's the better buy.
Which cruise stock should you invest in?
Both Carnival and Royal Caribbean are investment plays characterized by somewhat shaky financials, rebounding sales, and the potential for explosive turnarounds. These stocks seemingly trade at value-level prices, but there's uncertainty about whether the underlying companies will be able to bounce back to pre-pandemic performance and pay down high levels of debt.
Carnival's business has higher levels of debt, but it currently has more liquidity to navigate the turnaround, and its beaten-down stock could have more upside if the company manages to improve its financial position. Royal Caribbean looks more sound in terms of fundamentals, but it's also possible that this will be confounded by the company taking on more debt or pursing new share offerings to raise funds.
If you see the cruise industry making a strong recovery over the long term, investing in both stocks could be the right move. Otherwise, it's probably best to consider each company's financial position and business strengths to determine which has the more attractive risk-reward profile.
