Cruising: What's Not To Like?

During uncertain economic times, true value becomes the consumer's guiding mantra. Getting your money's worth on whatever it's spent on is the definition of true value in this sense. Whether it's a great meal at a discount, a good deal on a luxury car or going on a first-class vacation at a fraction of the expected price, true value for one's discretionary income has become a driving force in consumer culture. 
 
Evidence of the consumer seeking his money's worth is made clear in the success of discount coupon websites like Groupon (Nasdaq: GRPN) and Living Social as well as the proliferation of peer-to-peer deal/auction businesses like eBay (Nasdaq: EBAY). But nowhere is the pursuit of true value followed as strongly as in the leisure/travel business. Limited resources and uncertain economic times force consumers to seek out the most bang for their buck as possible. 
 
And I think I smell an opportunity for investors in this space...
 
The growth in the cruise line business is proof of this search for true value. Once reserved strictly for the wealthy, cruising has become the go-to vacation choice for the masses.  Not only does a cruise vacation offer true value for one's money, it's also a very relaxing way to vacation. Modern cruise ships are truly floating resorts, with all the luxuries and entertainment of land-based vacations. Not to mention the obvious appeal of moving from location to location without the hassle of packing and unpacking your belongings. No longer floating cafeterias and low-end hotel-type accommodations, as was offered at the start of the mass-market cruise boom, today's ships have recruited the world's best chefs and designers to create an experience that is second to none. 
 
The best part of taking a cruise vacation is the price. Generally, cruises are all-inclusive journeys, meaning that meals, entertainment and lodging are included in one price. This amount is often much lower than a comparable land-based vacation due to the economy of scale provided by cruise ships. The lower price combined with luxurious surroundings and the benefit of seeing numerous locations add together to create true value for the consumer. 

Big Revenues Keep Growing
The statistics reflect the popularity of the cruise industry. Annual revenue for cruise lines in the United States is over $38 billion, with more than 154 million passengers worldwide since 1990. The latest numbers indicate this industry is still growing, despite the worldwide economic slowdown.
 
Just as consumers look for true value in their choices, investors seek value in their portfolios. Provided the macroeconomic drivers of the value-oriented cruise industry and its surge in popularity; investment in this sector makes sense. Let's take a closer look at two of the major players.
 
1. Carnival Cruise Lines (NYSE: CCL)
This Miami, Florida-based company provides cruises to various vacation destinations with a portfolio of cruise brands comprising Carnival Cruise Lines, Holland America, Princess Cruises and Seabourn in North America; and AIDA Cruises, Costa Cruises, Cunard, Ibero Cruises and P&O Cruises in Europe, Australia, and Asia. The company trades at 15.5 times last year's earnings and pays a 3.2% dividend. The sinking of their European-based ship, Costa Concordia, in January 2012, knocked shares off of their $35 highs. The price has rebounded, however, recently trading in a tight $30-$33 channel. I would be a buyer on a break above the $33 level.

2. Royal Caribbean Cruises Ltd (NYSE: RCL)
This is another multi-brand, Miami Florida-based cruise company. It owns five cruise brands, which comprise of Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises, and CDF Croisieres de France. The company boosts a P/E ratio of 9.2 and has a dividend yield of 1.6%. Shares have been beaten down recently because the company cut its full year profit forecast due to rising fuel costs. Royal Caribbean may have acted too fast by cutting their profit forecast, however, because fuel prices are actually decreasing. The sell-off has set up a buying opportunity in the stock. Although the price is below the 200-day moving average, placing shares outside of my "value zone," opportunity exists by buying an upside breakout above $25.

Risks to Consider: Due to the international nature of the cruise industry, there are political and economic risks in buying these companies. In addition, fuel prices and other costs may start to increase, hampering growth prospects.
 
Action to Take --> I really like the cruise industry on many fronts. Serious upside potential exists in the business, especially as the global economy recovers and the carriers can afford to raise prices. I will be watching both of these stocks closely, and suggest buying on the upside breakouts noted above.

BY Dave Goodboy