Put Your Portfolio On ‘Cruise’ Control With This Cruise Stock

Travelers’ love of fun on the high seas seems to stretch as far as the horizon. Even as wider travel spending cooled following a blockbuster 2023, demand for cruise vacations is moving full speed ahead.

In 2023, 31.7 million people worldwide went on cruise trips, up 7% from 2019, according to the Cruise Lines International Association. It expects passenger numbers to reach 39.7 million by 2027.
However, the cruise industry is changing rapidly from what it was just a few years ago.

The reason is that the major cruise operators are steering their ships – and many hundreds of millions of dollars in investments – into their own private resort destinations packed with excursions, beaches, bars and restaurants.

Cruise Companies’ Private Resorts

This change began with Royal Caribbean Group (RCL), which in 2019 opened “Perfect Day at CocoCay,” an amusement park-like private destination in The Bahamas. Since then, the company spent $250 million to renovate CocoCay.

Since the resort’s opening in 2019, Royal Caribbean has prospered. For example, its third quarter expenses (including commissions) have increased 41%, while ticket revenues are up 48%.

In effect, it discovered a goldmine. By operating its own private destinations on a small Caribbean island, Royal Caribbean has managed to grow revenues faster. By having its own port and not having to pay passenger fees and government taxes, it is able to capture more of that total revenue.

Royal Caribbean is enjoying some of the best returns in all of the cruise industry right now, and the big edge they have is CocoCay. Barclays analysts attribute a nearly 8% rise in the cruise operator’s net yield — the main industry measure of profitability — to CocoCay.

In addition, passenger numbers are growing faster in the Caribbean than in all other major regions, driven by the popularity of private resorts.

That’s why everybody else is trying to catch up. Competitors Carnival (CCL) and Norwegian Cruise Lines Holdings (NCLH) are scrambling to recreate Royal Caribbean’s success.

Carnival is in the midst of developing the $600 million Celebration Key on the island of Grand Bahama. The “first-ever exclusive destination to be purpose-built” for the company will open next year.

Norwegian Cruise Line is building a two-ship pier to its own private island Great Stirrup Cay to allow it to double visitor numbers to 700,000 from 2026. The cost is $150 million.

Meanwhile, Royal Caribbean is not sitting still. It plans to spend about $650 million building the 200-acre Perfect Day Mexico resort on Mexico’s Caribbean coast in Mahahual. It will have beaches, water parks, and other entertainment. It is scheduled to open in 2027.

Royal Caribbean is also developing two beach clubs on islands in the Bahamas and Mexico to be opened by 2026, which are smaller than the larger Perfect Day resorts.

By 2025, passenger capacity at cruise company-owned private islands in the Caribbean will have more than doubled from 2019, according to Tourism Economics. It went on to say that, based on itineraries published as of July 2024, passenger capacity for private islands increased 41% year on year to about 10 million passengers.

Buy Royal Caribbean Stock

Carnival, Norwegian, and Royal Caribbean all recently increased their profit forecasts for this year, driven by rising bookings. These companies are shuttling a record number of travelers into the region on three- and four-day itineraries, with stops at private destinations.

And the cruise companies have already been posting banner earnings as the more affordable price of cruises attracts consumers itching to travel in the post-COVID era. Royal Caribbean shares are up 62.7% so far this year, while Carnival and Norwegian are up 21% and 29.4%, respectively.

In a July article, I said that as cruise stocks surge, Royal Caribbean is the best one to buy – and it remains my favorite.

RCL’s latest earnings report was stellar, showing adjusted earnings per share of $5.20, up 36% versus last year, thanks to robust pricing and lower costs. Net yields rose a whopping 7.9% as-reported, outpacing the firm’s 6.5% to 7% guidance and analysts’ 6.5% forecast.

Royal Caribbean indicated that demand and pricing have accelerated since July, pointing to further yield growth in 2025. The firm guided to more than $14 in earnings per share in 2025, ahead of analysts’ $13.25 forecast.

During its third-quarter earnings conference call on Oct. 29, the company’s CEO Jason Liberty said: “Perfect Day at CocoCay has been a game changer for both our guests and our business.” The company told investors this was, in part, because private destinations are driving “sizable, significant returns.”

Another factor at play is rising direct bookings that cut out travel agents. This allows Royal Caribbean to save on commissions, which are about 10% to 20% of the ticket price.

I’m encouraged by the continued resilience in booking trends, as evidenced by net yield growth of 13.2% year-on-year. New-to-cruise customers increased double digit percentage versus last year, while the company continues to see stronger repeat rates.

Royal Caribbean also continues to gain share among the millennials, or younger, consumers at a faster pace than any other generation. This group now represents one out of every two of its customers.

Add it all up, and RCL stock is a buy below $218.

On the date of publication, Tony Daltorio had a position in: RCL. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.