* All data are as of the close of Tuesday, December 9, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
Cruise Lines companies are categorized within the Resorts & Casinos industry of the Services sector, mixed in with casino hotel resorts and mountain skiing resorts as well.
While all such vacation getaways tend to follow similar market trends, I will here be separating the two largest U.S. cruise lines from other resort types to achieve an "all other things being equal" kind of comparison.
Let's first get to know our two contestants a little better.
• Carnival Corporation (NYSE: CCL), headquartered in Miami, Florida, owns several brands including Carnival Cruise Lines, Holland America Line, Princess Cruises, Seabourn, AIDA Cruises, Costa, Cunard, Ibero Cruises, and P&O Cruises. It owns and operates some 101 ships with a total of 212,000 berths, as well as 11 land-based hotels or lodges, and approximately 300 tour buses and 20 glass-domed railcars.
• Royal Caribbean Cruises Ltd. (NYSE: RCL), also headquartered in Miami, Florida, owns six cruise brands including Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises, CDF Croisières de France, and TUI Cruises. Its ships provide onboard dining, entertainment, spa facilities, and shore excursions. The company owns and operates 41 ships with 6 more under construction, and visits some 490 destinations on 7 continents.
Similar though the two companies may seem, their stocks' performances have certainly shown their differences. During the last major economic downturn, these discretionaries were hurt pretty hard as vacations are always among the first expenses to be slashed from budgets. Yet one of our two cruise lines encountered rougher seas than the other.
As noted in the graph below spanning the worst of the downturn from mid 2007 until market bottom in early March of 2009, where the broader market S&P 500 index [black] fell 56% and the SPDR Consumer Discretionary ETF (NYSE: XLY) [blue] fell 60%, Carnival [beige] held a steadier course as it fell 65%, where RC [purple] was hammered by the storm and careened some 86%.
Yet as most discretionary stocks go, the harder they fall in economic storms, the more spectacularly they rise when the investment climate clears up, as graphed below.
During the recovery since early 2009, where the S&P has risen 205% and the XLY has risen 340%, Carnival has not kept pace with either as it has risen only 160%, while RC has really caught a gust in its sails, rising some 1,275%.
On an annualized basis, where the S&P has averaged 35.65% and XLY has averaged 59.13%, Carnival has average a mere 27.83% while RC has sailed along at a steady clip of 221.74% per year!
And there appears to be even more smooth sailing on the horizon for the industry as a whole, as tabled below where green indicates outperformance while yellow denotes underperformance.
Over the current and next quarters, the industry's earnings are expected to grow at some 9.87 to 22.44 times the broader market's average earnings growth rate, on account of the winter period's increased getaways to sunnier climes.
Yet even over the longer term, the industry's earnings are still seen outgrowing the S&P's average at some 2.47 times its rate in 2015 and 2.22 times annually over the next five years.
Zooming-in a little closer, the two largest U.S. cruise lines are expected to continue their customary split performance, as tabled below.
While both are seen outgrowing the broader market clear across the calendar, Carnival is expected to have a better current quarter than RC.
But afterward, it's RC all the way, beating Carnival's earnings growth at some 1.34 to 1.55 times, while beating the S&P at some 3.12 to 3.36 times from 2015 forward.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the two compare against one another in other metrics, and which makes the better investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the better performing company will be shaded green while the worse performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Carnival generated the greatest revenue growth year-over-year, while RC enjoyed the greatest earnings growth, though both companies were quite close in both metrics.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our two contestants, Carnival operated with the widest profit and operating margins, while RC contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, RC's management team delivered the greatest returns on assets and equity, while Carnival's team delivered the least.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the two companies here compared, Carnival provides common stock holders with the greater diluted earnings per share gain as a percentage of its current share price, while RC' DEPS over current stock price is lower.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our two combatants, RC's stock is cheapest relative to forward earnings and 5-year PEG, where Carnival's stock is cheapest relative to company book value.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our two specimens, RC offers the highest percentages of earnings over current stock price for all time periods, while Carnival offers the lowest.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Carnival offers the greater earnings growth in the current quarter, where RC offers it the rest of the way.
Since Carnival's next quarter earnings growth is not available, the metric does not factor into the comparison.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Carnival's stock offers the greater upside potential and lesser downside risk, while RC's stock offers the lesser upside and greater downside.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up is analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our two contenders, RC is best recommended with 8 strong buys and 13 buys representing a combined 75% of its 28 analysts, with Carnival garnering 3 strong buy and 8 buy ratings representing 50% of its 22 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Carnival by just a couple of hull lengths, outperforming in 16 metrics and underperforming in 14 for a net score of +2, followed very close behind by RC, outperforming in 14 metrics and underperforming in 16 for a net score of -2.
Where the Cruise Lines industry is expected to outperform the S&P broader market astronomically this and next quarters, and significantly in 2015 and beyond, the two largest U.S. companies in the space are expected to perform much as they always have, with RC growing its earnings more robustly during this bull market while Carnival sails more gently.
Yet after taking all company fundamentals into account, Carnival Corporation seems the sturdier investment vessel, given its lower stock price to company book value, higher cash and lower debt over market cap, higher current ratio, higher revenue over market cap, greater trailing revenue growth, wider profit and operating margins, higher EBITDA over market cap and revenue, higher diluted earnings over current stock price, higher future earnings growth in the current quarter, higher dividend, and best price targets - narrowly winning the Cruise Lines industry race.