Inflation surged the most in January in the past three months. Consumer Price Index rose 0.5% in January, translating to an annual gain of 6.4%, while economists surveyed by Dow Jones had expected respective increases of 0.4% and 6.2%.

Cruise line companies have been witnessing eroding demand as high inflation levels and a slowing economy weigh on consumer purchase decisions.

Moreover, Fed Chair Jerome Powell had stated that rates could peak higher than expected if the labor market remains strong and inflation numbers do not fall, putting an end to hopes of a pause in rate hikes, which might tip the economy into a recession.

Also, the Fed’s rate hikes raise worries about the huge debt loads of cruise companies and their ability to recover amid an economic downturn. The persistently high inflation, aggressive interest rate hikes, and an impending recession might dampen the prospects of the cruise industry.

Hence, fundamentally weak cruise line stocks Royal Caribbean Cruises Ltd. (RCL), Carnival Corporation & plc (CCL), and Norwegian Cruise Line Holdings Ltd. (NCLH) might be best sold short or completely avoided in 2023.

Royal Caribbean Cruises Ltd. (RCL)

RCL operates cruises under the Royal Caribbean International, Celebrity Cruises, Azamara, and Silversea Cruises brands, which comprise a range of itineraries that call on approximately 1,000 destinations.

RCL’s forward EV/Sales of 3.20x is 157.7% higher than the industry average of 1.24x. Its forward Price/Sales multiple of 1.49 is 55.1% higher than the industry average of 0.96.

On February 8, RCL announced the commencement of a private offering of $700 million aggregate principal amount of senior guaranteed notes due 2030.

RCL’s total cruise operating expenses increased 57% year-over-year to $1.78 billion during the fourth quarter that ended December 31, 2022. The company’s adjusted net loss came in at $284.87 million, and the adjusted net loss per share stood at $1.12.

Analysts expect RCL’s EPS to be negative $0.70 for the current fiscal quarter ending March 2023. Its revenue is expected to be $2.81 billion for the same quarter.

The stock has declined 12.2% over the past year to close its last trading session at $75.75.

RCL’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

RCL is also graded a D in Stability and Quality. It is ranked #2 out of 4 stocks in the F-rated Travel – Cruises industry.  

In addition to the POWR Rating grades we’ve stated above, RCL’s rating for Growth, Momentum, Value, and Sentiment can be seen here.

Carnival Corporation & plc (CCL)

CCL engages in the provision of leisure travel services. The company operates a fleet of more than 90 ships that visit approximately 700 ports under AIDA Cruises, Carnival Cruise Line, Costa Cruises, Cunard, Holland America Line, Princess Cruises, P&O Cruises (Australia), P&O Cruises (UK), and Seabourn brand names.

CCL’s forward EV/Sales of 2.22x is 79.1% higher than the industry average of 1.24x. Its forward EV/EBITDA multiple of 11.10 is 11.1% higher than the industry average of 9.99.

During the fiscal fourth quarter that ended November 30, 2022, CCL’s operating costs and expenses widened 56.4% year-over-year to $4.98 billion. Its adjusted net loss came in at $1.07 billion. The company reported an adjusted loss per share of $0.85.

CCL’s revenue is expected to be $4.29 billion in the first fiscal quarter ending February 2023. Its EPS is expected to be negative $0.61 for the same quarter. Also, the stock has failed to surpass the revenue estimates in each of the trailing four quarters.

The stock has plunged 46.5% over the past year to close the last trading session at $12.19.

It’s no surprise that CCL has an overall rating of D, which translates to a Sell in our POWR Ratings system. The stock also has an F grade for Stability and a D for Sentiment and Quality. It is ranked #3 in the same industry.

Click here to see the POWR Ratings of CCL (Growth, Value, and Momentum).

Norwegian Cruise Line Holdings Ltd. (NCLH)

NCLH operates the Norwegian Cruise Line; Oceania Cruises; and Regent Seven Seas Cruises brands. It distributes its products through retail/travel advisors and onboard cruise sales channels, as well as meetings, incentives, and charters.

NCLH’s forward EV/Sales of 4.31x is 247.2% higher than the industry average of 1.24x. Its forward Price/Sales multiple of 1.52 is 58.5% higher than the industry average of 0.96.

NCLH’s total cruise operating expenses increased 181.7% year-over-year to $1.24 billion in the third quarter ending September 30, 2022. Its comprehensive loss amounted to $522.60 million. The company’s adjusted EPS amounted to a negative $0.64.

Analysts expect NCLH’s EPS to be negative $0.83 for the fourth quarter that ended December 2022. Its revenue is expected to be $1.50 billion for the same quarter. The company has failed to surpass the consensus revenue and EPS estimates in three of the trailing four quarters.

The stock has lost 19.7% over the past year to close the last trading session at $18.11.

NCLH has an overall F rating, which equates to a Strong Sell in our proprietary rating system. It also has an F grade for Stability and Quality and a D for Value and Sentiment. NCLH is ranked the last in the same industry.

To access the additional ratings for NCLH for Growth and Momentum, click here.

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RCL shares fell $0.94 (-1.24%) in premarket trading Thursday. Year-to-date, RCL has gained 51.22%, versus a 7.13% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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