By Jack Hough
Cruise stocks jumped this week on news the U.S. will begin to
normalize ties with Cuba. Investors are envisioning new routes to
the island packed with curious vacationers. But there are bigger
reasons to like shares of Carnival and Royal Caribbean Cruises,
which could return 15% apiece during the next year.
One is China, which is quickly developing an appetite for
shipboard vacationing. Both Carnival and Royal Caribbean have
committed ships there, with lucrative results. And both can sell
older vessels to Chinese investors, then operate them under
contract.
Another reason to like cruise stocks: plunging oil prices, which
cut expenses. A third reason is retiring baby boomers in the U.S.,
who have made cruises one of the fastest-growing parts of the
travel market.
Virgin Group, best known for flights and wireless service,
announced this month that it will enter the cruise business. It
says it wants to disrupt the industry with ships that are "sexy,
hip and cool."
Maybe, but new cruise ships can cost close to $1 billion apiece,
and Virgin plans to build two, which could take three years. A
capital outlay like that calls for more than visions of
sexiness.
Meanwhile, the incumbents are making upgrades of their own to
lure younger cruisers, adding ship-wide Wi-Fi, family suites and
peppier excursions with activities like zip-lining and
rock-climbing. Carnival (CCL) and Royal Caribbean (RCL) have both
recently turned small revenue increases into rapid earnings
gains.
Carnival has baggage. It has yet to recover fully from twin
disasters, the deadly sinking of the Costa Concordia off Italy in
2012 and a fire last year aboard the Carnival Triumph, which
knocked out power for both propulsion and support systems,
including sewage.
Carnival's "net yield," a measure of the revenue it extracts
from available berths, increased last quarter after nine quarters
of declines. Royal Caribbean, meanwhile, expects net yield to
increase next year for the sixth straight year. If Carnival can
close the image gap, its shares could soar.
Royal Caribbean is the safer bet, however. With a relatively
young and modern fleet, it will be able to dial back spending in
coming years. By 2017, free cash could top $2 billion a year.
That's more than 11% of the company's market value. Analysts expect
the dividend payment to double by then. Royal recently yielded 1.5%
and Carnival, 2.3%.
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