A Tale of Two Cruise Line Stocks

Last week was pretty jarring for investors figuring that cruise line stocks were essentially all in the same boat. Market cap leader Royal Caribbean (NYSE: RCL) put out an encouraging quarterly report on Tuesday. Smaller rival Norwegian Cruise Line (NYSE: NCLH) went the other way when it served up its latest financial results a day later.

Royal Caribbean posted better-than-expected growth through the first three months of this year, particularly on the bottom line. NCL saw year-over-year declines, particularly on the bottom line. There's a lot to unpack here, but the joy of a cruise getaway is that you only have to unpack once when you start a exploring the various ports of call. Bring a sense of adventure -- and perhaps some Dramamine -- as we head into the high and low seas.

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Some waters are choppier than others

Royal Caribbean saw its revenue rise 7% during the seasonally sleepy first quarter for the industry. This is its weakest top-line growth since resuming operations in late 2021 after the COVID-19-mandated shutdown, but the showing was in line with expectations. It was on the bottom line that Royal Caribbean really got going. Adjusted earnings soared 57% to $2.71 a share, well ahead of the $2.53 a share that Wall Street pros were modeling.

It was a different story for Norwegian Cruise Line. Revenue declined 3% at NCL, partly as a result of some maintenance work being done on some of its larger ships that put them briefly out of commission. Adjusted earnings plummeted 56%. Foreign exchange losses ate into profitability, but even without that hit, it would've still been a decline from a year earlier.

The comparisons don't end there. Royal Caribbean's net yield -- a popular industry metric that calculates adjusted gross margin per available passenger cruise day -- was 4.7% during the quarter. This is almost quadruple NCL's net yield of 1.2% for the period. Load factor or occupancy rate also favors the market cap leader, 109% vs. 101.5%.

The end result is that Royal Caribbean continues to be leader in terms of performance. Its net margin over the past four quarters stands at a robust 19.4%, more than double NCL at 9.1%.

Image source: Getty Images.

Earning its market premium and upticks

You would expect the market to pay a premium for Royal Caribbean's perpetually superior fundamentals. The market doesn't disappoint on that front. NCL definitely trades at much lower multiples on a trailing basis as well as a forward-looking basis.

Source: Yahoo! Finance.

Royal Caribbean is trading at nearly double the earnings multiple of NCL in all three timelines. Even if you circle back to the top line, Royal Caribbean trades at an enterprise value that is 4.9 times its trailing revenue. This is more than double NCL with a 2.4 multiple. Given the former's historically superior growth rates and margins, it's a premium that is more than warranted. If history is any indicator, Royal Caribbean will actually continue to grow faster than NCL -- and that also goes for its stock chart gains.

Source: Yahoo! Finance.

The disparity is dramatic, and it becomes more wealth-altering the further out you sail. It's hard to believe that Royal Caribbean has nearly tripled over the past three years while rival NCL is actually trading 13% lower. Go out to five years and Royal Caribbean is a five-bagger. NCL has generated an annualized return of 5%.

If there's a takeaway for investors here, it's that paying a premium is worth it for a superior operator in the same industry. There is a sound argument to be made that Norwegian Cruise Line represents a compelling value here, and I don't agree. I own a stake in NCL, but I have a larger position in Royal Caribbean. The gap should widen if history is any kind of teacher. The long-term prospects for the cruising industry are promising once you look past the current waves of tariffs and economic concerns. Just don't assume that every cruise line stock has the same seaworthiness before boarding the ship.

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Rick Munarriz has positions in Norwegian Cruise Line and Royal Caribbean Cruises. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.