Navigating towards big gains: Cruise industry undergoing a renaissance as passenger numbers soar

By Etain Lavelle

Published: 16:25 EST, 3 October 2014 | Updated: 03:27 EST, 4 October 2014

The cruise industry, once seen as the preserve of elderly Americans, is undergoing a renaissance.
Passenger numbers are soaring as younger Europeans take to the high seas.

They are likely to be joined on deck by newly affluent Chinese holidaymakers, as the economy there powers ahead.

Once viewed as the archetypal retirement pastime, families with young children have taken to cruises as a way of visiting several countries in a single holiday period without having continually to pack and unpack.

Plain sailing: A cruise ship in the Næroyfjorden, Aurland, Norway

Europe is the second largest cruise market in the world after North America, with European traveller numbers up 44 per cent to 6.4million in 2013 during the five years from 2008. In that time, the industry has grown in value by 22 per cent and is now worth more than 39billion euros.

North American cruise passenger numbers have jumped by 44 per cent although the share of the total market has fallen from 70 per cent to 55 per cent in 2013, according to the Cruise Lines International Association.

London-listed Carnival is the world’s largest cruise operator, followed closely by Royal Caribbean.
Italy, where the Costa Concordia hit rocks off the west coast in January 2012, is the most popular destination and some 7m passenger visits were made to cities such as Naples, Livorno and Civitavecchia, among others, last year.

Its popularity is followed by Spain and Greece, as well as the cities of Barcelona, Stockholm and Marseille. The industry created work for 165,000 across Europe, in jobs ranging from entertainers to travel agents. While the UK leads the way in terms of passengers on cruise ships in Europe, a burgeoning middle class in China, India and other emerging markets is likely to fuel longer-term growth, industry analysts say.

So how can private investors benefit from the forecast stellar growth in the industry? The easiest option is to buy stocks in the companies that run most of the world’s cruise ships: Carnival Cruise Lines, Norwegian Cruise Lines and Royal Caribbean Cruises.

Credit Suisse analysts rate the sector an ‘outperform’, following solid third-quarter results, notably from Carnival. The broker attributes its optimistic outlook to an improving environment in the Caribbean, emerging opportunities in China, a benign fuel environment and positive signs of European consumer growth. ‘China could evolve into the biggest cruise market over an extended period,’ the broker said last month.

Norwegian Cruise Lines, which is listed on the US Nasdaq stock market, is another avenue through which to invest – as is Royal Caribbean, which is listed on the New York Stock Exchange and rated a ‘buy’ by Richard Carter at Deutsche Bank.

He raised his price target on the group by a chunky 31 per cent to $80 and lifted earnings forecasts by 8 per cent to 12 per cent for 2015-2017.

‘Cash flow is rising, helped by improving industry fundamentals and three new vessels arriving within the next two years,’ Carter said, forecasting that the group’s dividend payout will rise to 1.8 per cent in 2015 and 2 per cent by 2016.

JP Morgan’s Kevin Milota takes a less bullish view, rating both Royal Caribbean and Carnival Cruise Lines ‘neutral’.

In a note to investors last month, Milota said that the management at Norwegian Cruise Holdings remains committed to a share buyback and dividend programme, although this is likely to be delayed by a year due to the acquisition of Prestige Cruise Holdings last month in a $3billion deal.

Steven Wieczynski, an analyst at Stifel, rates the stock a ‘buy’ following the Prestige purchase, and raised earnings estimates for 2015-16. He argues the luxury cruise market is more resilient than the contemporary, or mass market.

‘Luxury has been the one area of the cruise industry which has been relatively stable over the past couple of years, whereas the contemporary brands have been impacted by economic events and negative press headlines,’ he says.