Do you know someone who has been on a cruise ship lately?
The cruise industry is now a multi-billion dollar industry with great growth opportunities.
The following information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
Do cruise ship companies make money?
Yes, they can be highly profitable. At AtlasTrend, our Splurging Baby Boomers Fund is currently invested in Royal Caribbean Cruises Limited. The following infographic shows how Royal Caribbean made US$1.1 billion of adjusted net profit in 2015.
What are the top 5 reasons for investing in cruise ship companies?
1. Cruising is growing in popularity particularly in Asia: In 2015, only 1 million cruise passengers were from China (a similar number to Australia which has a far smaller population). However, by 2020, the Chinese government expects 4.5 million cruise passengers from China per year while cruise ship operator Carnival is even more optimistic suggesting the market for China cruise passengers may exceed 5 million by 2020. Together with the continuing (though lower) growth in cruising from North American and European passengers, the cruise industry is set for potentially strong demand in the coming years.
2. Committed growth in new passenger capacity: To meet the upcoming demand, over the next 5 years 139,000 berths (from 44 new ships) have been committed by cruising companies to be built. This is a 29% increase in passenger carrying capacity globally.
3. Baby boomers’ spending power: Cruising has demographic and spending power on its side. Baby boomers (those born between 1946 and 1964) are a key customer group for cruise ship companies. With more baby boomers heading into retirement over the next decade, there will be greater demand for cruises. Baby boomers being the wealthiest proportion of the global population are also able to spend more on their cruising holiday which will help boost cruise liner profits.
4. Dominated by 2 rational companies: Royal Caribbean Cruises and Carnival together have approximately 70% market share of the global cruise passenger market. It is essentially a duopoly where both companies are rational competitors who don’t tend to engage in prolonged price wars. As a result, shareholders should be the long term winners.
5. Relatively cheap valuation with good earnings growth: Our preferred investment in the industry is Royal Caribbean. The company currently trades at less than 11x FY2017 P/E with over 15% projected FY17 earnings growth. This is a relatively attractive valuation for buying Royal Caribbean shares given the positive industry dynamics over the next 5 to 10 years.
In addition to the 5 reasons above, shareholders of some cruising companies also gain a shareholder discount. Although we would never recommend buying shares just because you might get shareholder benefits, if the investment stacks up then any shareholder benefits are a bonus. For example, Royal Caribbean shareholders (with 100 shares or more) receive up to US$250 of onboard credit every time they cruise on a Royal Caribbean ship. 100 shares in Royal Caribbean Cruises currently costs approximately A$10,000.
If you’re a fan of cruising or believe the industry is set for a positive decade, then it could well be worthwhile to start considering investing in cruise ship companies.