Carnival Corporation Stock Upgraded: Is It Time to Buy a Cruise Ship Stock?

By Markets Fool.com

It's been only a monthsince downgrades from JPMorgan Chase sank the stocks of cruise line operators Royal Caribbean (NYSE: RCL) and Norwegian Cruise Lines (NASDAQ: NCLH), and shook investors' faith in the cruise industry in general. Back then, JPMorgan spied weakness in the European cruise industry in particular, and warned that it saw little chance of a "rebound" in cruise industry pricing. But now, just a month later, one banker is starting to see hope on the horizon -- and it's upgrading a third cruise line in response to it.

Continue Reading Below

This morning, analysts at Bernstein announced an upgrade of Carnival Corporation (NYSE: CCL) stock. JPMorgan had previously derided Carnival as "premium" priced, but Bernstein thinks the stock, which costs less than $52 today, could soar as high as $68 -- delivering a 31% profit in just one year's time. Is Bernstein right about that, or is Carnival stock really too "premium" priced to buy?

Here are three things you need to know.


All aboard cruise line stocks? Image source: Getty Images.

Royal Caribbean: Cheaper than most?

Before we get to the stock that Bernstein likes, let's take a look at one that JPMorgan did not like: Royal Caribbean. With a stock down 13% over the past 52 weeks, it would appear that many investors share JPMorgan's reservations about Royal Caribbean stock. And yet, it's hard not to view the stock's valuation as compelling.

Continue Reading Below

According to data from finviz.com, Royal Caribbean is currently the cheapest of the three big cruise line stocks, selling for just 14.5 times trailing earnings, despite sporting a pretty attractive projected earnings growth rate -- 17.2%. Royal Caribbean also pays a nice dividend yield -- 2.3% -- which adds to the stock's attraction.

Added to the growth rate, this gives Royal Caribbean stock a total return ratio of 14.5 times earnings, divided by 19.5 return from growth and income, equals 0.7 -- which could equal a buy in many investors' books.

Norwegian Cruise Line Holdings: Hardest hit

Norwegian's shares have been hit even harder by pessimism in the cruise sector -- down 30% in a year. That's not quite enough to make Norwegian the cheapest stock in the sector, but at a P/E ratio of just 15.3, it may be cheap enough. Norwegian pays no dividend, but its 21.8% projected growth rate should more than make up for that fact.

According to data from StreetInsider.com, Bernstein downgraded Norwegian Cruise stock to market perform today. But given that the stock's total return ratio looks similar to Royal Caribbean's at 0.7, I'd say both stocks look similarly attractive.

Carnival Corporation: A port in a storm?

Last but not least, we come to the one stock that Bernstein likes most in this industry. In a write-up on TheFly.com this morning, Bernstein praises Carnival Corporation's "remarkable stability" in a sinking sector. While Royal Caribbean's stock has fallen over the past year, and Norwegian's went down even faster, Carnival stock sells for just about the same price today that it sold for one year ago.

Such stability has resulted in investors valuing Carnival stock higher than its peers: 15.9 times earnings. But while JPMorgan is right that this is a "premium" to Norwegian's P/E ratio of 15.3, and Royal Caribbean's 14.5, it's not a huge premium, nor an unwarranted one.

Why Carnival might be best of breed

For one thing, Carnival Corporation pays the best dividend of the three cruise ship stocks discussed so far -- a healthy 2.7% yield. Finviz data also shows Carnival to be earning both the best gross profit margin (42.6%) and net profit margin (15.1%) of the three, and doing so despite carrying the lightest debt load -- a long-term debt-to-equity ratio of just 0.4.

Combine Carnival stock's 16.3% projected growth rate over the next five years with its superior dividend yield, and you end up with a 19% projected total return on the stock. That seems more than a fair profit to make on a stock selling for less than 16 times earnings -- especially when you consider the relative safety of the investment afforded by Carnival's superior balance sheet.

Long story short: Carnival stock is the cruise line stock that Bernstein likes best. I agree.

10 stocks we like better than Carnival
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Carnival wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 330 out of more than 75,000 rated members.

The Motley Fool recommends Carnival. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.