RCL: Royal Caribbean vs. Carnival: Which Stock is a Better Buy?

With the second wave of the coronavirus emerging across European countries and Russia, the United States is not likely to impose national lockdowns although local ones are possible. This could affect the economic recovery that began in the spring. With a 33.1% sequential improvement in GDP in the third quarter, as estimated by the Bureau of Economic Analysis, the economy’s momentum is likely to remain positive although growth may be dampened by the coronavirus.

The Center for Disease Control and Prevention had signed an 8-month no-sail order in March, which was uplifted recently. However, before ships resume traveling, Royal Caribbean Group (RCL) and Carnival Corporation & plc (CCL) are required to undertake simulation sailings to prove it can control a COVID-19 outbreak. This implies indirect travel restrictions are still applicable on RCL and CCL until at least the end of this year.

Both RCL and CCL declined year-to-date on account of the pandemic disruptions. However, with the gradual recovery of the economy raising the demand for traveling, RCL gained 39.9% over the past six months, while CCL could not return to positive.

But which stock is a better buy now? Let’s find out.

Latest Developments

RCL recently added Silver moon luxury cruise ship to its fleet, which has one of the highest space-to-guest-ratio out of the existing collection. With the demand for traveling accelerating after months of social distancing and lockdown, RCL’s destination-focused cruise brand Azamara is scheduled to commence operations from March 2021. Pre-booking for the voyage to Europe in March has already begun, reflecting strong demand.

RCL raised approximately $500 million through senior notes offering in October to finance debt repayment and general corporate expenses.

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CCL’s Costa Delioza cruise currently operates its one-week itinerary to Greece and Italy till January and is one of the few cruises functional amid the pandemic. The company has already scheduled flagship trips to South America starting in November 2021. CCL subsidiary Costa cruises have completed Italy’s first LNG bunkering operation as of October 26th. CCL’s German-based subsidiary Aida cruise resumed operations on October 17th. It is planning to launch a new cruise line Mardi Gras in November 2022, the pre-bookings for which have already begun.

Recent Financial Results

RCL registered losses for the third quarter ended September 2020, as the pandemic continued to affect its business operations. The company is focused on maintaining a strong liquidity position throughout this quarter. As of September 30th, 2020, the company had $3.70 billion in liquidity reserves, raised through a combination of debt and equity issuance, and a 12-month commitment for a 364-day revolving credit facility.

As business operations remained negligible during the third quarter ended September 2020, CCL focused on preserving liquidity higher than the cash burn for the maintenance of its fleet, interest payments, and other fixed expenses. The company has raised $12.50 billion since March through senior notes offering, debt amortization, and export credit facility.

Past and Expected Financial Performance

RCL’s total assets increased at a CAGR of 14.8% over the past three years. The company’s EPS and revenue are expected to rise by 34.8% and 94.2%, respectively, next year.

CCL’s total assets, on the other hand, rose at a CAGR of 7.7% over the past three years. Analysts expect EPS and revenue to grow 45.6% and 51.9%, respectively, next year.

Profitability

CCL’s revenue is 1.31 times what RCL generates. However, RCL is more profitable with a gross margin of 35.9% versus CCL’s 4.8%.

Valuation

In terms of trailing 12-month price/ Sales, RCL is currently trading at 1.51x, 60.6% more expensive than CCL, which is currently trading at 0.94x. Also, RCL is more expensive in terms of EV/ Sales (3.70x versus 2.90x) and Price/ Book ratio (1.33x versus 0.60x).

Thus, CCL is a more affordable stock here.

POWR Ratings

Both RCL and CCL are rated “Strong Sell” under our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for both these stocks:

RCL has an “F” for Trade Grade, Buy & Hold Grade and Industry Rank, and “C” for Peer Grade. It is currently ranked #3 out of 5 stocks in the Travel- Cruises group.

CCL has an “F” for Trade Grade, Buy & Hold Grade and Industry Rank, and “D” for Peer Grade. It is currently ranked #4 in the same industry.

The Winner

The second wave of coronavirus has hit most European countries, resulting in fresh lockdown imposition and social distancing guidelines. The United States is expected to witness a surge in coronavirus infected patients soon with the onset of winter, which could lead to a travel ban.

The complete recovery and eradication of COVID-19 are unlikely soon, as no definitive news regarding effective vaccination is available. This, combined with rising cases in most parts of the world, should discourage people from traveling, particularly for recreational purposes. Though RCL and CCL are trying to resume their operations by next year, the demand is likely to remain repressed until an effective cure is available or the curve flattens completely. As no time frame can be predicted for this to happen, investing in cruise stocks such as RCL and CCL is extremely risky now. So, while RCL is a winner because of its higher profitability and revenue growth potential, it wouldn’t be wise to bet on it now.

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RCL shares were trading at $57.88 per share on Tuesday afternoon, up $0.86 (+1.51%). Year-to-date, RCL has declined -56.22%, versus a 6.07% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...