Listed cruise companies had a strong year in 2017, boosted by favourable economic conditions and upgrades to shipping fleets. Shares in the world’s biggest operator, Carnival (CCL) – which is listed in London and New York – hit a record high in 2017. In 2017, the share price surged 30% to £53.60, before dropping back towards the end of the year. Shares in Royal Caribbean (RCL) almost doubled from September 2016 to late 2017. From a low of $6 just after the financial crisis, the shares are now trading at $123. Morningstar equity analysts believe that profit expansion can continue in the cruise sector given the operators' willingness to adapt new technology.
There are risks attached to 2018 forecasts – including a slowing of global growth, a weakening of consumer sentiment, higher fuel costs and adverse currency moves – but our long-term thesis is that North American and Chinese demand should allow ships to sail full without fail over at least the next decade.
New Ships Mean Higher Profits
Both Carnival and Royal Caribbean Cruise shares are trading above our fair value estimates, which were raised last year in response to upbeat outlooks from the cruise companies. The focus in recent years on controlling costs, rational pricing, and carefully managed supply have been integral in keeping returns trending in the right direction, and a relatively stable global economic environment has kept momentum in consumer spending, supporting leisure activities. Rival operator Norwegian Cruise Line (NCLH) has a four-star rating from Morningstar analysts, and at $55, is trading below our fair value estimate of $66. All three companies have “narrow moats” assigned to them, which means they have a slender competitive advantage.
We contend that the cruise business is better positioned to weather a downturn in the future. The operating efficiency of the fleet is better than it was just a decade ago, with newer ships having a markedly improved profit profile versus the older ships in the fleet. And cruise operators are now able to react to consumers that have an increased willingness to travel at any given time, creating a more stable pricing environment.
Sourcing over a wider global base allows cruise companies to strategically gain customers from different regions where consumer spending is forecast to be robust, and also tap into a larger number of customers overall. For example, in 2005, the industry sourced nearly 70% of travellers from North America and the remainder from the rest of the world. In 2016, the percentage of cruisers sourced from North America had decreased to just over half.
Wearable Tech and Apps for Travellers
New technologies are also a factor in the cruise companies’ recent success: Royal Caribbean recently launched its Project Excalibur app, Sea Beyond, which will be available across 13% of its fleet by the end of 2018. The app allows, on any device, the ability to check in, plan excursions, track baggage, order food and drinks, and even turn on your cabin television. Carnival is also planning to launch an “Ocean Medallion” digital key, which can be worn as a wristband or pendant to open doors and make onboard purchases.
Our projections estimate that cruise operators could handle more than 16.3 million travellers in 2025. Growing from roughly 12 million cruisers to more than 16 million cruisers to 2025 represents a more than 30% increase in traveller growth over the next decade. This is helped largely by the sizable baby boomer demographic moving into retirement years.
China represents the biggest opportunity for the companies over the coming years. We forecast China could deliver 7.3 million passengers by 2025, up from 2.1 million in 2016, which would put it in second place behind North America today in terms of cruise market size – North America had 12.4 million cruisers in 2016. Still, with rising living standards, this is a conservative figure as a percentage of the 200 million Chinese people who will have the means and opportunity to travel overseas over the next decade.
