High inflation, consecutive federal rate hikes, and looming recessionary fears might cause significant headwinds for cruise line companies. So, I think this is not the right time to invest in Royal Caribbean Cruises Ltd. (RCL) and Carnival Corporation & plc (CCL) for the reasons mentioned throughout this article.

Inflation has caused Americans to reduce their discretionary spending, including travel. Furthermore, recession fears may further slow travel demand, harming the cruise line industry’s growth. According to Statista, there is probability of 70.9% that the United States will fall into an economic recession by May 2024.

In addition, recurrent federal rate increases are projected to keep cruise lines under pressure. Debt-laden businesses may struggle to recover in the face of a broader economic crisis. In June, the Fed kept the funds rate target steady at 5%-5.25%. However, following the FOMC decision, the Fed Chair reiterated multiple times the importance of raising rates further this year.

Let’s delve deeper into the fundamentals of the featured stocks.

Stock to Hold:

Royal Caribbean Cruises Ltd. (RCL)

RCL operates cruises under the Royal Caribbean International, Celebrity Cruises, Azamara, and Silversea Cruises brands, which comprise a range of itineraries that call on approximately 1,000 destinations.

RCL’s trailing-12-month levered FCF margin of 12.23% is 237.1% higher than the 3.63% industry average, while its trailing-12-month EBIT margin of 3.55% is 51.1% lower than the 7.27% industry average.

RCL’s total revenues increased 172.4% year-over-year to $2.89 billion in the fiscal first quarter that ended March 31, 2023. Its net loss and loss per share came in at $47.91 million and $0.19, respectively.

RCL’s revenue is expected to increase 49.4% year-over-year to $13.21 billion for the year ending December 2023. Also, its EPS is expected to come in at $4.77 in the same quarter. The stock has gained 210.8% over the past year to close the last trading session at $101.28.

RCL’s POWR Ratings reflect uncertainty. The stock has an overall rating of C, equating to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

RCL also has a C grade for Value, Sentiment, and Quality. It is ranked #2 out of 4 stocks in the Travel - Cruises industry. Click here for the additional POWR Ratings for Sentiment and Growth for RCL.

Stock to Avoid:

Carnival Corporation & plc (CCL)

CCL engages in the provision of leisure travel services. The company operates a fleet of more than 90 ships that visit approximately 700 ports under AIDA Cruises, Carnival Cruise Line, Costa Cruises, Cunard, Holland America Line, Princess Cruises, P&O Cruises (Australia), P&O Cruises (UK), and Seabourn brand names.

CCL’s trailing-12-month EBITDA margin of 7.35% is 31% lower than the 10.65% industry average. Its trailing-12-month EBIT margin of negative 5.96% compares to the 7.27% industry average.

For the fiscal second quarter that ended May 31, 2023, CCL’s operating expenses grew 23.7% year-over-year to $4.79 billion. Its adjusted net loss and adjusted loss per share stood at $395 million and $0.31, respectively.

CCL’s accumulated deficit came in at $841 million for the period ended May 31, 2023, compared to $269 million in retained earnings for the period ended November 30, 2022. Its total current assets came in at $6.21 million compared to $7.49 million for the same period.

Street expects CCL’s EPS to come in at negative $0.12 for the year ending November 2023. It missed EPS estimates in all four trailing quarters. CCL’s shares have lost 2.1% intraday to close the last trading session at $18.90.

It’s no surprise that CCL has an overall D rating, equating to a Sell in our POWR Ratings system. It has an F grade for Stability and a D grade for Quality. It is ranked #3 in the same industry.

Beyond what is stated above, we’ve also rated CCL for Growth, Sentiment, Momentum, and Value. Get all CCL ratings here.

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RCL shares were trading at $101.67 per share on Wednesday morning, up $0.39 (+0.39%). Year-to-date, RCL has gained 105.68%, versus a 17.78% rise in the benchmark S&P 500 index during the same period.

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.

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