Cruise Your Way To Profits

Once reserved for the wealthy, the ocean cruising vacation business has become extremely popular across all economic and demographic categories.

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  • In fact, cruise ships have become the truly economical way to experience luxury travel thanks to economies of scale and heavy competition among the major providers.

    The industry is truly immune from economic cycles with even the financial crisis of 2008-2009 not causing much of a slowdown.

    Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom of Hofstra University published a study on the cruise business revealing the following facts.

    The industry carried about 20.1 million passengers in 2012, up from 7.2 million in 2000. The global growth rate of the cruise industry has been enduring and stable, at around 7% per year despite economic cycles of growth and recession.

    For instance, the financial crisis of 2008-2009 has not impacted the demand for cruises.

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  • The Hoffstra University study goes on to explain the growth of the industry by pointing out that the size of the global cruise markets doubles about every 10 years, which represents an annual growth rate of about 7%.

    In addition, the study went on to provide three reasons why the cruise business is not affected by economic downturns

    First, the size of the global cruise industry is relatively small compared with the tourism industry, which accounted for 1 billion arrivals in 2011. For instance, it was estimated that about 37 million people visited Las Vegas in 2010, while the global cruise industry carried about 18 million passengers the same year. However, this observation must be tempered by the fact that most cruises typically involve 3 to 5 ports of call with the corresponding number of visits per passengers. So, 18 million passengers are accounting for several visits each during a cruise.

    Second, the industry remains fundamentally derived by the supply of ships and itineraries. The strategy is thus to fill the ships, which are a fixed supply, and when the demand is weaker, discounts are offered to keep the ships full.

    Third, the customer base of the cruise industry tends to be of a higher income level than the customer base of the tourism industry at large. This market segment is usually less impacted by economic downturns.

    What I like best about the Hofstra University study is that it revealed the incredible upside potential of the cruise business for investors.

    It stated that the growth in income levels in many countries, including developing economies, has expanded the customer base susceptible to take a cruise. In light of this context, there is little evidence about the full extent of the market potential of the cruise industry and when a saturation point could be reached.

    Talk about an incredibly bullish proclamation!!!

    The Investment Opportunity

    Now that we understand the amazingly bullish nature of the cruise business, let’s drill down into the perfect stock market opportunity within the industry.

    There are three major players in the industry are Royal Caribbean (NYSE:RCL), Carnival Corporation (NYSE:CCL), and Norwegian Cruise Lines Holdings (Nasdaq:NCLH).  Even entertainment companies like Disney (NYSE:DIS) and noted entrepreneur Richard Branson’s Virgin Group have thrown their hat in the ring due to lucrative and long term nature of the business growth.

    There are investment plusses and minuses for each of the major publically traded cruise companies. Right now, I firmly think that the best stock market investment opportunity is with Royal Caribbean (NYSE:RCL).

    The primary reason is the incredible performance and guidance the company just posted.   Let’s take a closer look.

    The company describes itself as the world’s second largest cruise line and also offers unique land-tour vacations in Alaska, Asia, Australia/New Zealand, Canada, Dubai, Europe and South America.

    The cruise company owns six brands, Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisières de France, as well as TUI Cruises through a 50 percent joint venture.

    Together, the company runs a combined total of 42 ships globally with a selection of itineraries that call on approximately 490 destinations on all seven continents.

    RCL is on the cutting edge of what’s hot in the world of cruising.  By constantly upgrading entertainment option onboard the ships and shore excursions, Royal stays on the cutting edge of the industry.

    The ships offer an extensive array of activities, services and amenities, including simulated surfing, swimming pools, sun decks, beauty salons, exercise and spa facilities, ice skating rinks, in-line skating, basketball courts, rock climbing walls, miniature golf courses, gaming facilities, lounges, bars, Las Vegas-style entertainment, cinemas and Royal Promenades, which include interior shopping, dining and an entertainment boulevard.

    The future growth plans are bright with the company’s brands introducing eight more ships by the end of 2018, increasing the fleet to a total capacity of approximately 130,900 berths.

    The latest results were extremely bullish with  adjusted Net Income for the second quarter of 2015 clocking in at $185.0 million, or $0.84 per share, compared to Adjusted Net Income of $146.7 million, or $0.66 per share, in the second quarter of 2014, representing a 26% increase over the same quarter last year.

    US GAAP Net Income for the second quarter 2015 was $185.0 million or $0.84 per share, compared to $137.7 million or $0.62 per share in 2014.

    It is important to note that currency and fuel were the biggest drivers of the earnings increase versus guidance, Net Yields on a Constant-Currency basis also increased 4.2%.

    Yields were better than expected, mainly driven by close-in pricing in the Caribbean and China. Constant-Currency NCC excluding fuel increased 3.4%, which is 110 basis points better than guidance, mainly due to the timing of shipboard projects.

    Bunker pricing net of hedging for the second quarter was $599 per metric ton and consumption was 338,000 metric tons.

    While these metrics are very positive, the real bullish story lays in the future guidance!

    The company has updated full year Adjusted EPS guidance to a range of $4.65 to $4.75. The $0.15 increase versus April guidance is driven by beneficial currency and fuel rates.

    Better than expected performance in the Caribbean and China in Q2, and a modest increase in costs are essentially offsetting each other and are neutral to earnings. The cost increase in the second half of the year is for some additional marketing activities focused on 2016.

    Constant-Currency Net Revenue Yields are now expected to increase in the range of 2.9% to 3.9%, versus previous guidance of 2.5% to 4.0%, and Net Cruise Costs excluding fuel are expected to be better than flat, versus previous guidance of flat to down 1%.

    Bookings since the April earnings call have been healthy and the company continues to be booked ahead of last year in both load factor and APD. A solid Caribbean environment is more than off-setting softness on Latin American sailings associated with our Pullmantur brand.

    Taking into account current fuel pricing, interest rates, currency exchange rates and the factors detailed above, the company expects 2015 Adjusted EPS to be in the range of $4.65 to $4.75 per share.

    “Momentum in the Caribbean continues at a solid pace, and our strong booked position in the third and fourth quarters gives us confidence as we move through the second half of 2015,” said Jason T. Liberty, chief financial officer. “The trajectory of our brands is firmly on course for another record year of earnings, with healthy trends extending into the first quarter of 2016.”

    While it is too early to provide a detailed picture for 2016, first quarter bookings are running well ahead of last year at higher prices, with improvements in the Caribbean continuing at a robust pace.

    When you consider the fact that fuel prices are projected to continue falling, consumer confidence is climbing, and the potential of the emerging markets, it spells an incredibly bullish picture for Royal Caribbean.

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