Last week’s wild ride for consumer-sensitive stocks made the seas a little rough for cruise ship operators Carnival Corp. & plc (CCL, CUK) and Royal Caribbean International (RCL). The general feeling, apparently, was that a consumer slowdown would keep people from taking cruises, while a tax rebate might be spent on one.
Hogwash, I say. In each of the last 12 years, the combined revenues of Carnival and Royal Caribbean increased. The worst year for either company was the 4% revenue decline Carnival suffered in 2002. While it is true that the last recession was not consumer driven, the companies also held up well in the early 1990’s recession.
There have been lots of theories as to why cruises haven’t lost their luster during times of economic hardship. Some say it is because the cost per day of cruising compares favorably to other vacation alternatives, making a cruise even more attractive during hard times. Others attribute it to the relative immaturity of the industry during the last consumer recession.
I say the answer is in plain sight, right on the companies’ balance sheets as a line item called “Customer deposits.” Cruises are often booked 6-18 months in advance, and a non-refundable deposit (typically several hundred dollars per person) is required upon reservation.
At the time the customer books the cruise, the economy looks fine. By the time the customer realizes times are tough, a significant portion of the cost is already sunk and the customer figures, “I might as well go.” Only if the recession is prolonged enough for customers to stop making advance bookings would the lines be likely to see a falloff in business.
So far, that doesn’t seem to be much of a concern. Carnival’s advanced deposits ended the year (their fiscal year-end is November) at $2.8 billion, up 20% from the prior year-end. Sales, meanwhile, grew just 10%. When earnings were released on December 20 the company said, “Advance bookings for the first half of 2008 are well ahead of last year in terms of both occupancy and pricing, on a cumulative basis. Advance bookings for the second half of 2008 are also shaping up in a similar fashion to the first half of the year, although it is still early in the booking process.”
Those tax refund checks may come at an opportune time after all.
Valuations for the stocks look reasonable. Both companies are trading at a P/E of about 14x trailing earnings and a price-to-book ratio of about 1.2x. The consensus long-term growth estimate is 14% for Carnival and 12% for Royal Caribbean.
