Carnival Corporation (CCL), Royal Caribbean Cruises Ltd. (RCL): Should You Buy Tickets for This Carnival?

Carnival Corporation (NYSE:CCL) is aptly named, as investors have seen rollercoaster-like ups and downs over the past decade. And just like a rollercoaster, the end point is the same as the starting point. In other words, those who have invested in Carnival Corporation (NYSE:CCL), over the past decade, have not made any money.

It’s tough to say that Carnival Corporation (NYSE:CCL) will suddenly right the ship and become a slow and steady winner. What’s more likely, is it will experience more volatility and more underperformance. Still, let’s take a look just to be sure.

Most news is bad news

In this industry, investors don’t want to see a cruise line making news, because it usually means there has been another incident at sea. Carnival Corporation (NYSE:CCL) might be the largest cruise company in the world, with a market cap of around $29 billion, but its name is also associated with many incidents, including:

Costa Concordia: Tragic accident off West Coast of Italy (led to reduced bookings)

Carnival Dream: Lost power, toilets not operational

Carnival Elation: Failed steering mechanism

Carnival Triumph: Engine fire, adrift in Gulf of Mexico for 4 days

Carnival Splendor: Fire

These incidents have adversely impacted Carnival’s reputation. And while it would be nice to report good news and quality management, many passengers have complained about the way some of these events were handled.

Carnival Corporation (NYSE:CCL) saw its top and bottom-lines decline in 2012, after two years of improvement. The good news is that Carnival is capable of navigating its way through these stormy waters. With an industry-best net margin of 9.79%, around $3 billion in operating cash flow, and the stock trading at 20 times earnings, the fundamentals are mostly sound. Carnival also yields 2.70%.

Short term, Carnival is facing two big headwinds. One, marketing and promotions have increased in order to boost ticket sales. This, in turn, has the potential to negatively impact margins and earnings. Two, the broader market looks to be frothy at the moment.

Approximately 40% of earnings growth has come from stock buybacks, not organic growth. If interest rates increase and companies stop borrowing money on the cheap in order to buy back their own shares, then there will be a flight to quality. Unfortunately, Carnival Corporation (NYSE:CCL) doesn’t fit into that category.

Related options

Royal Caribbean Cruises Ltd. (NYSE:RCL) is the second-largest cruise company in the world, with a market cap around $8.5 billion. Its fleet might not be as large as Carnival, but its ships are bigger. This allows for more revenue per ship. Royal Caribbean Cruises Ltd. (NYSE:RCL) has seen increased bookings and higher ticket yields, but optimism might be irrational considering the stock is trading with a high earnings multiple.

One of the great aspects of Royal Caribbean Cruises Ltd. (NYSE:RCL) is its geographic diversification. With exposure to Latin America, Europe, Australia, and North America, strength in one market has the potential to make up for weakness in another.