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Combine the “what happens in Vegas” approach to vacations with a little of the wholesome fun of The Walt Disney Co. (NYSE: DIS) and you get a pretty good idea of why so many people are going on cruises these days.
Cruises offer something for everyone. One man’s party ship is at the same time the site for a five-generation family reunion. Either way, there’s typically an abundance of food and entertainment mixed in … all covered with the price of your ticket.
For years, singles and families, young and old, have been taking cruise vacations and investors have noticed. Shares of Carnival Corp. (NYSE: CCL) have risen 40% over the past year, and among vacationers and investors alike, the 2012 Costa Condordia disaster in Italy seems to be a distant memory.
Look at some other major cruise line stocks and you’ll see a similar pattern.
After hitting bottom around 2011 or 2012, cruise line stocks are on a roll, reflecting strong demand among consumers who invariably seem to have a short memory for the occasional high-profile disasters that have left travelers ill or stranded at sea. Royal Caribbean Cruises Ltd. (NYSE: RCL) stock has risen about 55% over the past year and Norwegian Cruise Lines (NASDAQ: NCLH) shares are up 67%
The Fuel Factor
There is, of course, another factor this year that’s putting wind in the metaphorical sails of the cruise industry, and that’s low fuel prices. Fuel is one of the major expenses involved in running a cruise ship and it has gotten a lot cheaper.
And while the industry has in recent months benefited from cheaper fuel, the increased demand it is enjoying seems to be a more longstanding trend. In 1990, cruise ships carried about 3.8 million passengers worldwide. That rose to more than 21 million last year, and Cruise Market Watch projects that by the year 2020, more than 25 million passengers will travel on cruise ships worldwide.
Financial performance varies, somewhat, by cruise carrier, but for the most part, results have been strong. Last year, Carnival’s net income grew to $1.79 billion from $1.32 billion the year before. Norwegian Cruise Line’s net income more than doubled to $338.4 million, and Royal Caribbean also enjoyed a sharp increase in net income, which rose to $764.2 million from $473.7 million.
It’s worth noting however, that strong earnings notwithstanding, sales growth has been much slower at least at Carnival and Royal Caribbean. And you don’t have to look at a balance sheet to appreciate that hockey-stick growth cannot continue forever.
The cruise industry is thriving today, but it’s already had a sustained period of growth. It’s easy to look back five or so years and see an industry recovering from a period of lackluster demand and multiple public relations disasters.
Cruise Line Stocks Face Slower Growth
The reality, however, as the Cruise Market Watch data shows, is that the cruise industry has been growing for a long time. Today it’s a mature industry that will inevitably enter a period of slower growth.
The industry will also face pressure to strike the right balance between low fares that have made cruising such a popular middle-class vacation option, and growing profits. Today low oil prices are working in the industry’s favor, but they could very well rise in a few short months or years and upset that delicate balance between low prices and high profits.
So while these stocks have been very good to investors this year, I’m not convinced they have so much growth potential going forward. The business has seen strong growth for a quarter century and that seems to have been factored into today’s cruise company stock prices.
Like most maturing industries, the cruise industry faces a future that’s likely to be more challenging than the past 25 years.
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