Are Calmer Seas Ahead For These Cruise Lines?

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Includes: CCL, RCL
by: Matt Schilling

On Thursday June 7th Nomura raised its second quarter profit estimates for both Royal Caribbean (NYSE:RCL) and Carnival Cruise Lines (NYSE:CCL) by noting that both companies have benefited from lower fuel costs. Analyst Harry Curtis also raised his profit estimates for the companies, which should lead investors to examine both companies much closer in the second quarter.

Royal Caribbean Cruises Limited - Founded in 1968, and based in Miami, Florida, RCL currently trades at a P/E ratio of 9.28 and in a 52-week range of $18.70/share (52-week low) and $39.43 (52-week high). Analysts expect RCL to earn $0.02/share for the second quarter on revenue of $1.84 billion dollars and $2.01/share on revenue of $7.85 billion for the year.

Investors looking to establish a position at these levels should do so moderately for two reasons. First, potential investors need to pay close attention to fuel spending, and any reduction thereof because a short term pop in the stock has the potential to take place. Secondly, a strong second quarter EPS surprise followed by positive guidance will also boost the stock. The company's EPS has the potential to surpass estimates by as much as $0.02/share on revenue of $1.95 billion dollars or higher. If the company can continue to demonstrate positive results in such areas as the Asian region, and more specifically China, then the company has the potential to trade at or near the low $30/share range.

Carnival Cruise Lines - Founded in 1974, and based in Miami, Florida, CCL currently trades at a P/E ratio of 15.68 and in a 52-week range of $28.52/share (52-week low) and $38.83 (52-week high). Analysts expect CCL to earn $0.07/share for the second quarter on revenue of $3.55 billion dollars and $1.61/share on revenue of $15.68 billion for the year.

Investors looking to establish a position in CCL should do so cautiously. Even though the company has recently guided toward higher earnings due in part to lower fuel costs, the sinking of the Costa Concordia is still fresh in the minds of many potential investors. That being said, CCL has noted the charges and fees associated with the ships sinking should begin to shrink in the third quarter and a brighter outlook for the company could be on the horizon. One catalyst investors should consider is the fact that for every 10% decrease in fuel spending CCL generates $0.30/share in EPS. CCL has the ability to demonstrate both stronger EPS and stronger revenue growth in quarter, and estimates could be surpassed by as much as $0.03/share on revenue of $3.65 billion or higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.