Raging seas or calmer waters

June 11, 2013, 08:50 am ET, BY Jolene W.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The cruise industry is a competitive industry with Carnival Corporation (NYSE:CCL) leading in terms of size and more recently, at-sea troubles.  Its safety issues seem to have started in January 2012 when Carnival’s Costa Concordia shipwrecked in the island of Giglio, Italy, as the world watched in horror.  32 people died and 80% of the passengers injured in the shipwreck while the captain of the ship awaits trial on July 9. 

The shipwreck occurred at a bad time for Carnival as the entire cruise industry struggled to profit amidst a global economic crisis.  Its stock was on a consistent decline since 2011.  At the end of January 2012, its stock price was $32, 33% less than a year ago.  At $32.50 today, the company has yet to regain its stock price.  Carnival is expected to report its second quarter earnings on June 21.  Since the company recently lowered earnings forecast for the rest of 2013 in May, its second quarter results will most likely be bleak and indicative of a stagnant 2013.   

Since the shipwreck in Italy, other at-sea ship troubles have ensued leaving many people wondering about the safety of cruise ships in general.  Carnival’s most recent mishap being a fire on its Triumph that left the ship stranded in the Gulf of Mexico in February.  Carnival’s ships weren’t the only ships that appeared to be plagued with safety issues.  The world’s second largest publicly-traded cruise company, Royal Caribbean Cruises Ltd. (NYSE:RCL), hit the press in May with a fire aboard its Grandeur of the Seas.  Like Carnival, Royal Caribbean’s stock price is now at an all-time low of $35, 30% less than its high of $50 in January of last year.  It doesn’t look like stock prices are climbing up anytime soon for these two companies.

There are only but a few major players in the cruise industry.  And when one ship sinks, the whole industry usually goes down with it.  Even though the world’s third largest publicly-held cruise company, Norwegian Cruise Line Holdings Ltd. (NASDAQ: NCLH), hasn’t caught much media attention it has certain caught its industry’s plight.  Since its recent initial public offering in January at $19 per share, it is not doing too poorly.  Currently trading at $32, it is 68% higher than its IPO price.  However, most would agree that its stock could have performed better had it not been for its peers’ bad publicity stunts.      

Despite industry-wide troubles and mounting litigation suits against Carnival, these issues are momentary troubles.  While these companies are struggling right now, calmer waters are in the horizon for the industry and here is why:

1. The cruise industry is not going away anytime soon.  Despite safety concerns and lawsuits, people are still going on cruises albeit at record discounted tickets.  With enough time passed, people will eventually forget and business will be as usual. 
2. The industry has high barriers to entry.  The average cost to build a cruise ship is approximately $450 million to $1.5 billion.  At such a high initial investment cost, it is difficult for newcomers to enter the industry and as such, protect these companies from new competitors.
3. Maritime law and waivers signed by passengers generally protect cruise companies from most lawsuits.  Carnival will most likely ward off these lawsuits or settle in its favor.
4. U.S. consumer spending is up.  As the global economy rebounds from the 2008 crisis, these companies will see better profits and stock prices will eventually pick up.

These three stocks are at a great discount thanks to recent cruise mishaps.  Of the three, Royal Caribbean is the greatest value considering its projected growth versus size and stock price.  The company projected a growth in profits this year and 4% annual growth through 2017.  Its projected capital expenditures is in the billions for the next few years as it ordered a third quantum ship, a luxurious mega-ship with bumper cars, a sky diving simulator, and a look-out pod, with its first quantum ship to set sail in 2014.  Carnival, a close second, has a lot of to catch up and is taking great strides to remedy its bad publicity.  A positive indicator of its restructuring efforts is the comeback of its retired CEO, Bob Dickinson, as a consultant.  Norwegian Cruise is also a good buy but may be too highly leveraged for the likes of some investors.   

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