Royal Caribbean vs. Carnival: One Cruise Giant Has a Clear Profitability Advantage

Cruise stocks are still riding robust demand since the pandemic recovery, with Royal Caribbean (NYSE: RCL) and Carnival (NYSE: CCL) both posting record results over the past year.

For investors trying to choose between them, the decision isn't as simple as buying the stock with the lowest valuation.

Over the long run, better businesses will generate superior returns for shareholders. Carnival looks cheaper on traditional metrics like the price-to-earnings ratio, but Royal Caribbean has produced significantly better shareholder returns in recent years despite trading at a higher valuation.

To see why the higher-priced stock might be the better deal, let's look at how these companies compare on operating performance.

Image source: Getty Images.

Why Royal Caribbean is the better business

Royal Caribbean consistently generates higher margins. Last year, Royal Caribbean earned $4.3 billion in adjusted net income on $17.9 billion in revenue -- a profit margin of 24%. Earnings rose 33% year over year to $15.64.

Management thinks earnings can keep climbing. The company is guiding for 20% annualized earnings growth through 2027.

Carnival is also delivering solid results, with record revenue and net income last year. Its plan calls for adjusted earnings to rise 50% cumulatively from 2025 through 2029. Investments in exclusive destinations like Celebration Key are expected to lift margins and earnings.

Still, Carnival's 11% profit margin is below Royal Caribbean's. That difference is significant. Higher margins give a company more flexibility to reinvest, reduce debt, and weather downturns. It also helps explain why Royal Caribbean has delivered better returns over the last decade. Its tilt toward the premium end of the market supports stronger pricing, which tends to lift margins and earnings.

The performance gap shows up in their respective stock performance. Both stocks have delivered similar returns over the past one-year period, but Royal Caribbean has significantly outperformed Carnival over the past three-, five-, and 10-year periods. Over the past three years, Royal Caribbean shares climbed 309%, compared to Carnival's 142% gain.

Paying up for quality usually pays off

Investors might be tempted to choose Carnival because it looks inexpensive, trading at 10 times this year's earnings estimate. Royal Caribbean may look pricier at a 14 forward price-to-earnings (P/E) ratio. But the lower price doesn't always mean a better deal.

Royal Caribbean's higher valuation reflects the market's view that it's the stronger operator, and that shows up in its higher margins. The company has been investing in newer ships, including its Discovery Class, which management says will "redefine how Royal's guests experience the world."

Royal Caribbean also expects investments in fleet growth, loyalty enhancements, and exclusive destinations to expand its customer base. Management has said roughly 80% of early river cruise bookings are coming from existing customers, suggesting it can broaden its offering while leaning on a loyal audience.

Carnival, meanwhile, is the largest cruise operator, serving more than 13 million passengers a year. Its strategy is built around competing more aggressively on price to attract a broader customer base.

That approach can drive volume, but Royal Caribbean's premium positioning is more likely to translate into durable profitability over time. Analysts expect Royal Caribbean to deliver nearly 17% annualized earnings growth, compared with roughly 12% for Carnival. Royal's higher earnings growth will likely deliver superior returns, making it the better buy.

John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.