Sizing Up Royal Caribbean and Norwegian for Investors
While Carnival is the undisputed leader in cruising, its two biggest rivals, Royal Caribbean (NYSE: RCL) and Norwegian Cruise Lines (NASDAQ: NCLH), are holding their own in this growing part of the travel industry.
In this segment from Industry Focus: Consumer Goods, Vincent Shen and Motley Fool contributor Daniel Kline conclude their discussion of cruise companies by looking at how both Royal Caribbean and Norwegian approach their businesses.
A full transcript follows the video.
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This video was recorded on Feb. 20, 2018.
Vincent Shen: Going to the other two players now, smaller but still the dominant ones in this industry, first we have Royal Caribbean. They're the second-largest cruise operator. They have owned and partnered brands that combine for 49 ships and capacity of about 123,000 passengers. Royal Caribbean, I think, is notable in their fleet, because they have some of the biggest ships. Their largest ones can accommodate over 5,000 passengers. I was looking at the list of largest cruise ships in the world, and I think something like the top five out of six, for example, are all the Royal Caribbean line.
Dan Kline: They're pushing the boundaries with things like ice skating rinks and rock climbing walls in addition to water parks on board. We parked next one, or berthed next to one, and it was really impressive to look at.
Shen: Royal Caribbean, I mentioned to some of those owned and partnered brands. They have their namesake Royal Caribbean, Celebrity, and Azamara Club Cruises. They also partner with, in Germany and Spain and China, some other companies as well. Again, to give you a sense of how confident right now the management team seems to be in terms of growth for this industry, and the increased capacity that they want to be able to deliver, they have nine ships that are expected to be delivered between 2018 and 2022. That would add over 30,000 in passenger capacity to their fleet. Not net, again, because they're going to retire some older ship, most likely. The metric that we've been talking about, the revenue yield, for Royal Caribbean, was incredibly strong in 2017.
Kline: They've been laser-focused, since 2014, on doubling their return on invested capital and doubling their earnings per share. That's been all they talk about in every earnings call.
Shen: The double-double, yeah.
Kline: And they've reached it.
Shen: That revenue yield number was up 5.9% in 2017. This was the eighth consecutive year of yield growth, very impressive. And then, with that double-double milestone that they reached, the company is granting equity bonuses to all of its employees, except corporate officers, that equal about 5% annual salary. So it's interesting to follow.
Something else I noted is, the companies will also calculate, on the flip side, their cost yields. For example, here, while their revenue yields were up, like I said, about 5.9%, really strong growth, cost yields were only up about 2%. So profitability for Royal Caribbean has been really strong. Their gross and net income margins were up over three percentage points each in 2017. Again, dividend payer, very manageable payout ratio. They've repurchased about $1 billion of stocks since 2014. The actual raw gross yield number was about $237 last year, compared to $200 for Carnival. We're going to see for this last company we talk about, Norwegian, how it goes up due to a bit more of a focus on a premium clientele, premium experience.
Last one, Norwegian Cruise Lines. $5.3 billion revenue in the trailing 12-month period, so the smaller of the three.
Kline: And about 25 boats.
Shen: Yeah, 25 ships.
Kline: So, a quarter the size of Carnival.
Shen: 50,000 berths, or passenger capacity. I wanted to hone in on a specific piece of their business recently. They've been talking a lot about the Norwegian Joy recently. This is a recent ship that was delivered last year. It caters specifically to the Chinese market. A big part of the ship that they've touted is, for example, the technological integration, this one zone with different gaming and virtual reality experiences and things like that, really appeals to the consumers in that market. But I also thought it was really interesting, management spoke to some quirks, call it, with Chinese consumers, that they're still adjusting to. It seems like all the operators are kind of working to adjust the business model to this.
Kline: The technology, we should also talk about, it isn't just for customer enjoyment. There's an analytics aspect to it.
Shen: Yes, absolutely.
Kline: So, what they're figuring out, in the U.S. market, they have a long history of, when a person who looks like me, traveling with one child in a family group, they know what I'm going to spend, they know what I'm probably going to do, they're going to have to figure that out, but the technology makes it faster. They can see, Dan browsed this excursion, but he didn't buy it. And then, if they're light on that excursion the next day, maybe I get a coupon. Maybe I got a deal. So they're going to come up to speed in China a lot faster than they've come up to speed in other markets.
Shen: And the analytics aspect of it is really big. As they serve more passengers in that market, they learn more about the consumer. But a few things but they've noted, higher food costs. Chinese cruise passengers love to eat. They've noticed a little bit higher food cost in that region. But they've also been hurt in some ways, because, we're talking about that onboard revenue, usually about 25% of the top line for these companies, more of the revenue in the Chinese market is coming from shopping and less of it is coming from excursions. They're not as interested in those port excursions, and that's hurting some of their profitability.
Kline: And some of it is just cultural. We've seen, things like pay-per-view have not worked in the Chinese market, because there's not a history of paying for add-ons. That's sort of the same things that cruise ships have to figure out. And they might have to do things like, the price is going to be higher, but this add-on is now included. And you do see that in the U.S. market, where you could pay twice as much for a cruise but it's all you can drink, and the internet is thrown in. It's really just getting that data and tweaking it to hit how you price, whether it's onboard revenue or ticketing revenue.
Shen: Last point, Carnival, gross yield $200. Royal Caribbean, $230. Norwegian, about $300. So, take from that what you will in terms of how they target the different --
Kline: And it speaks to ticket price. That's basically the order of low-end, medium-end, and high-end in the industry.
Shen: I want to end now, just a couple of more minutes, talking about some of the strengths that really speak to the stability and how favorable it is, the operating conditions, for the top three companies here in cruising. If there's any industry out there with high barriers to entry, I think this is definitely one, considering a new ship can cost $500 million to build. Not only that: Even if you have the money to build the ship, there's a very limited shipbuilding industry that can put together these massive ships. And they operate at capacity with commitments with the major operators for years and years, so it's really tough to even get your name into the queue, essentially.
Kline: Which is why ships get cycled down the line.
Shen: And something else is the logistics involved in operating a cruise line. Going through the annual report for these companies, it's fascinating to see all the different things that they keep in mind in terms of building the ship, the food and services on board, safety regulations, staffing, finding ports, the marketing. It's jaw-dropping, how much complexity there is in the logistics. Again, another barrier to entry, and why it's very favorable to be a Carnival, for example, with 50% market share in this space.
Daniel B. Kline has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.