Royal Caribbean, Carnival: Deals on the Open Sea

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Includes: CUK, RCL
by: Jeffrey McLarty

Steady and/or consistent dividends, as well as sub S&P average price to earnings ratios, are terms describing London based Carnival (NYSE:CUK) and Miami based Royal Caribbean Cruises (NYSE:RCL). Both are operating in a sector with high entry barrier and benefiting from the current demographics. While it’s obvious that travel anywhere, by plane, train, taxi cab or cruise, is being hurt by fuel costs, these fees are being passed onto the consumer. It’s definitely not changing people’s mind to cruise. While rising fuel costs will hurt their bottom lines, channel checks, according to Lehman Brothers, have all been positive, they cite rising ticket prices and upgraded both stocks on the 10th of October.

In reality, these stocks are just plain cheap right now. While this goes for both, RCL is a little bit smarter of a pick right now. While an investor could sit back and try to speculate on the better of the two, or if the industry is a good bet, the truth is the numbers don’t lie. And analysts concur, RCL is the buy.

There are signs everywhere of business in the sector being good. Carnival’s 3Q profit just saw an increase of 12%, while Royal’s 2nd quarter profit posted higher earlier this summer. Qualitative signals include Royal starting a new French brand, and Carnival buying a new ship due 2010.

What makes Royal the better candidate is a list of many things. The stability surrounding their operations are enticing for longer term investors. For comparison, Royal has 42000 employees - that is 1/50th the size of Wal-Mart (NYSE:WMT) and 4 times as many as Carnival. Here’s the kicker: Royal has a market cap ¼ as lean as Carnival coming in under 10B compared to Carnival’s. Plus, Royal is anticipated to actually grow this year, giving investors something to actually look forward to. Royal’s PE is approximately equal to Carnival’s, however it has an FPE of about 25% lower. These two contrasting stocks have me questioning my sources of data, however it makes sense because Royal’s revenue is 39% higher than Carnivals $4.3B annually, something I was glad to see with 4 times the number of employees. Royal also caters to a higher end or clientèle, a clientèle that is less likely to worry about the rising fuel costs. Don’t misinterpret my lack of faith in Carnival; by 2011 they plan to expand their fleet by over 20%, something that could give way to multiple expansion in the long term, and cause CUK to outpace RCL on a price point basis. One more reason to buy RCL over CUK: guess who has options listed at 35% implied volatility and guess who doesn’t? I’ll tell you, Royal’s covered calls looks like a very nice way to make more than 10%, before Christmas.

Disclosure: The author has no position in any of the companies mentioned.