Cruise-Liner Shares Leave Many Stocks in Their Wake
October 01 2015 - 8:20AM
Dow Jones News
Three years ago, investors in cruise-ship companies joined
passengers in taking their money elsewhere.
But major cruise-liner shares have staged a comeback. Business
is recovering following the calamities that befell the industry,
from sick-passenger outbreaks to the 2012 grounding of the Carnival
Corp.-owned Costa Concordia. Meanwhile, lower fuel prices and a
pickup in consumer spending have translated into higher profits and
revenues for cruise operators.
Shares of Carnival, Royal Caribbean Cruises Ltd. and Norwegian
Cruise Line Holdings Ltd. have notched double-digit percent gains
in their stock prices in the past year.
The stocks have pulled back in recent weeks as investors have
trimmed top-performing shares. But cruise lines have held up
relatively well in recent months as jitters over global growth have
undermined the six-year-old bull market in stocks.
Investors have been rewarded for sticking to shares of companies
tied to this year's uptick in consumer spending. Restaurants, food
companies and drink makers are among the corners of the market that
have held up this year despite a broader market slump, as many
money managers continue to bet on an accelerating U.S. economy.
"There is a scarcity of growth and this is one of the few areas
that is offering it," said Peter Stournaras, a portfolio manager at
the $4.7 trillion asset-manager BlackRock. "There's a lot of
consumer tailwinds … and they're in the bull's-eye."
Mr. Stournaras, who oversees $17.8 billion in large-cap funds,
has been a longtime owner of cruise-line stocks. He also has been a
buyer of shares of restaurant companies and other
consumer-discretionary shares, though has stayed away from shares
of many retailers, arguing that consumers are increasingly opting
to spend their extra dollars on novelties like cruises rather than
on traditional goods.
Among the factors working in cruise operators' favor has been
the yearlong tumble in energy prices. Fuel typically accounts for
about 20% of the industry's operating expenses, a figure that has
been declining and is likely to continue shrinking in the coming
years assuming oil prices remain near current levels, according to
Robin Farley, an analyst at UBS who follows the industry. Crude
prices have fallen 50% from a year ago, a factor that has also put
more money in the pockets of cruise passengers.
The prospects of new routes to Cuba and nascent growth in China,
where cruise lines are still making inroads, have also made the
stocks more attractive, investors say.
At the same time, the industry has rebounded from its troubles
of a few years ago, allowing companies to once again start raising
cruise fares, helping to boost profits and revenue, investors
said.
Shares of Royal Caribbean have fallen 2.2% this week through
Wednesday, while Norwegian stock is down 5.6% and Carnival is off
2.3%. And the possibility of another cruise-ship disaster could
once again sour consumers on cruise vacations and force another
round of painful price cuts, investors warned.
"There's always the risk that one of these cruise ships hits a
rock, or you get an outbreak of some disease on a ship and it
freaks everyone out," said John Toohey, portfolio manager on the
$2.3 billion USAA Cornerstone Moderately Aggressive Fund, which has
been buying shares of cruise companies over the last year.
Other buyers cautioned that the sector's strong performance of
the past year has made the stocks pricey.
Companies in the sector have posted among the strongest earnings
among big companies in recent quarters. In the first half of the
year, profits at Carnival more than quadrupled, while earnings at
Norwegian grew 26% and Royal Caribbean earnings rose 20%.
Profits at S&P 500 companies contracted for the first time
in three years in the second quarter, and analysts project another
decline in the third, according to FactSet.
"We have a positive consumer backdrop in the U.S. and we have a
healthier labor market," said Susan Bao, portfolio manager of the
$12 billion J.P. Morgan U.S. Equity Fund, a longtime owner of
cruise line stocks. "We expect better demand going forward from a
leisure-demand perspective."
Write to Dan Strumpf at daniel.strumpf@wsj.com
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(END) Dow Jones Newswires
October 01, 2015 08:05 ET (12:05 GMT)
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