The China situation
China doesn’t seem like a country that spends much time on leisure, but it actually spends 20% more on overseas tourism than the United States. Spending $100 billion a year on tourism, China is a market that Royal Caribbean is trying to infiltrate. This is no easy task when China shares a sea with Japan. Tension has risen between the two countries surrounding disputed islands in the East China sea. Royal Caribbean has been forced to remove all Japanese ports of call, shortening cruise itineraries.
This problem is hurting cruise growth in China, but if the two countries could come to an agreement, then China could be a huge source of revenue for Royal Caribbean. Until then, China will still be a growing revenue source with massive potential.
Quantum leap
Royal Caribbean just signed a contract with Meyer Werft shipyard to build its third quantum ship. A “quantum ship” is a luxurious mega-ship that seems more like a moving island than a boat. With bumper cars, a sky diving simulator, and a look-out pod, quantum ships are pushing cruise ships to another level. A quantum ship is yet to take a voyage, but Quantum of the Seas is primed to set sail in 2014 followed by Anthem of the Seas in 2015.
With projected capital expenditures of $700 million in 2013, $1.2 billion in both 2014 and 2015, and $2.1 billion for 2016, these jaw dropping ships won’t come cheap. Royal Caribbean sees it as a necessary expense and expects its capacity to expand 4% annually from 2012 to 2017.
Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) is also making new ships to compete with Royal Caribbean. Set to release in 2013 and 2014, Norwegian Breakaway and Norwegian Getaway are being advertised as “Miami’s newest ships.” While they will be new, they don’t look nearly as impressive as the quantum ships. Promotional videos for the 2013 ships can be seen on YouTube if you’re interested.
Conclusion
When you look at Royal Caribbean as a whole, it looks like it will be able to overcome the bad press and enjoy success with its itineraries and quantum ships in the coming years. Currently trading at $35.78, the stock price has already bounced back from the dip following the recent fire. With a forward P/E ratio of 11.62 and a PEG ratio of 0.84 I believe this stock is currently undervalued.
Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) could look like a tempting buy in the wake of Royal Caribbean’s recent ship problems, but I would stay away from this investment. Norwegian has had revenue growth of only 2.40% and no earnings growth. They have nice ships, but the quantum ships being released in the future will draw consumers from Norwegian. Royal Caribbean is also a strong brand with plenty of customer loyalty that will keep it at the helm of the cruising industry for years to come.
The article This Cruise Stock Is Still Afloat and Might Get Better originally appeared on Fool.com.
Ben Popkin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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