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Norwegian Cruise Ord(NCLH-N)

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Better Buy: Royal Caribbean or Norwegian Cruise Line Stock?

Motley Fool - Thu Mar 23, 4:10AM CDT

Amid the cruise industry's record-breaking "wave season" this year -- a period following the winter holidays when cruise companies offer discounted packages to entice buyers -- investors are curious to see if cruise line stocks can regain their lost luster.

Today, I'll compare two major American cruise line stocks to determine which makes the better buy in the current market.

The case for Royal Caribbean

With record-high bookings in recent months, Royal Caribbean Cruises(NYSE: RCL) plans to sail its full fleet this year and maximize earning potential. The company generated $2.6 billion in revenue last quarter, amounting to positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) totaling $409 million.

During Royal Caribbean's fourth-quarter earnings call last month, CEO Jason Liberty said, "We finished 2022 on a high note and are entering 2023 with the full strength of our operating and commercial platforms."

Fourth-quarter revenue of $2.6 billion was a 265% improvement over the same period in 2021, and its adjusted EBITDA sum of $409 million came in at the high end of the company's guidance range. Full-year 2022 revenue of $89.8 billion was even more impressive, eclipsing 2021's result more than six times over.

While revenue surged last quarter and year, so did operating expenses. In the fourth quarter alone, net cruise costs, excluding fuel, climbed 3.9% year over year, including a 100-basis-point impact from health restrictions and reactivating Royal Caribbean's crew and ship network.

With the fleet and crew now in position, and COVID-19 protocols abating worldwide, chief financial officer Naftali Holtz expects these "transitory costs to substantially dissipate." But other costs for food and beverage, air fares, and fuel remain a concern.

To combat operating expenses, Holtz and team look to bolster margins through "operational and distribution efficiencies and leveraging group scale." Despite what looks to be a record year ahead for Royal Caribbean, its stock trades nearly 53% below pre-pandemic highs.

The case for Norwegian Cruise Line Holdings

Another cruise stock with potential recovery on the horizon is Norwegian Cruise Line Holdings(NYSE: NCLH). It drove higher revenue in the fourth quarter of 2022 than in the same period in 2019.

The Miami-based cruise line also had a longer booking curve last quarter than in the fourth quarter of 2019.

Viewed as a "forward-looking indicator" by CEO Frank Del Rio, the company's lengthening booking curve points to growing demand for travel experiences. And the fourth quarter's better-than-expected onboard revenue generation, which Del Rio considers a "real-time indicator of consumers' actual spending," was also promising.

On the quarterly earnings call last month, Del Rio said, "The bottom line is our target consumer continues to be willing to spend on travel and experiences now and in the future."

Norwegian drove revenue last quarter more than three times higher than the same period in 2021, and generated full-year 2022 revenue seven times higher than full-year 2021. In all, 2022's revenue of $4.84 billion fell 25% short of 2019's $6.46 billion. But fourth-quarter revenue of $1.52 billion actually surpassed the $1.48 billion during the same period in 2019.

If that isn't encouraging enough for a stock that's 78% down from its pre-pandemic highs, Norwegian's total revenue per passenger cruise day surged 24% above 2019 levels last quarter. Translation: Guests aboard Norwegian ships have been spending significantly more.

While fourth-quarter revenue beat 2019 levels, the company ended the period with an adjusted EBITDA loss of $41.4 million, versus 2019's positive fourth-quarter adjusted EBITDA profit of $383.4 million. Operating expenses that were substantially higher than in 2019 continue to hurt performance for Norwegian, with inflation only fanning the flames.

Amid a challenging operating environment, Norwegian expects costs to ease as this year progresses. Looking ahead, increased occupancy along with efficiency improvements should lead the company to a "lower cost run rate," chief financial officer Mark Kempa said.

Which cruise line stock is a better buy?

Since both companies reported net losses last year, let's compare their price-to-sales (P/S) ratios, price-to-book (P/B) ratios, revenue gains, and expanding debt levels.

MetricRoyal CaribbeanNorwegian Cruise Line
Market cap$16.28 billion$5.46 billion
Price-to-sales ratio1.841.12
Year-over-year revenue gains in 2022477%648%
Long-term debt percentage increase since 2019153%109%

Table data: Ycharts, Seeking Alpha, company reports.

With a lower price-to-sales ratio, better revenue gains last year, and less debt accumulation since 2019, Norwegian Cruise Line Holdings is the better buy in today's market. Investors should pay close attention to future earnings reports to ensure Del Rio and his team remain on course toward profitability.

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Micah Angel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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