Cruise stocks got another player on April 30 when Viking Holdings (NYSE:VIK) sold 73.6 million shares to the public at $24, making it the largest IPO so far in 2024.
The cruise industry has come back from the darkest period in its history. More people traveled on cruises in 2023 (31.7 million passengers or 107% of 2019 volume) than ever before. By 2027, experts expect to see 39.4 million passengers travel on a cruise.
While Viking didn’t get all of the proceeds from the IPO (its insiders received 85% of the proceeds of the shares sold), the listing valued the luxury cruise operator at $14.25 billion, including $5.4 billion in debt and $1.5 billion in cash and cash equivalents.
Its enterprise value at the $24 IPO price was 13.1x its 2023 adjusted EBITDA of $1.09 billion. Viking shares gained nearly 9% in its first day of trading and were up 18.8% as of May 10.
If you’re a shareholder of a cruise operator, you’ve got to be very happy with Viking’s successful IPO.
What are the best cruise stocks to buy? Here are my three choices.
Royal Caribbean Cruises (NYSE:RCL)
Royal Caribbean Cruises will always hold a special place in my heart because my wife and I got married on one of their cruise ships back in 2005.
I’ve long stated that the cruise industry will continue to benefit from the value proposition provided to its passengers relative to other trips. As I mentioned in the introduction, the number of passengers taking a cruise is expected to continue to grow over the next few years.
Royal Caribbean should be the biggest beneficiary of this growth. It currently has 65 ships worldwide travelling to over 1,000 destinations. In addition to owning the Royal Caribbean International, Celebrity Cruises, and Silversea Cruises brands, it also has 50% ownership of a joint venture that operates TUI Cruises and Hapag-Lloyd Cruises. Further, it has eight ships on order that will add to its passenger capacity as they’re delivered.
At the end of April, Royal Caribbean reported Q1 2024 results. Between record bookings and strong onboard spending, the company’s business is in excellent shape. It expects to earn $10.80 in adjusted earnings per share in 2024, at the midpoint of its guidance.
That’s just 13x its EPS guidance and 11.4x its EBITDA. In 2019, RCL stock traded at 17x EBITDA, suggesting that its shares are significantly undervalued, despite gaining 85% over the past year.
Viking Holdings (NYSE:VIK)
I chose Viking because its net debt of $3.9 billion is just 3.6x EBITDA, which is lower than Royal Caribbean. RCL has a total debt of $21.04 billion and cash and cash equivalents of $437 million, for a net debt of $20.60 billion. That translates to 4.2x its trailing 12-month EBITDA of $5.06 billion.
Further, Viking’s River business has a unique selling proposition relative to other large cruise operators. It owns 80 river vessels, each accommodating 190 guests, with 18 on delivery by 2026. Founded in 1997 with four river ships, the segment generated $2.34 billion in revenue and $389 million in operating income in 2023.
Meanwhile, VIK’s Ocean business has nine ocean ships, with six more to be delivered by 2028. These ships hold as many as 998 guests per cruise. The segment delivered an operating income of $441 million in 2023 on revenue of $1.95 billion.
While the operating margins of its ocean ships (22.7%) are much higher than those of its river ships (16.6%), the cost to build the former is much higher than the latter. VIK’s IPO prospectus points out that the six ocean ships to be delivered by 2028 cost an average of $488 million compared to $42 million for each of the river ships. Further, the useful life of the river ships is about 40% longer.
“Our core demographic of curious, affluent travelers aged 55 years and older, which we believe is an attractive segment that continues to be significantly underserved,” stated the company in its IPO prospectus.
Carnival (NYSE:CCL)
Carnival is the lowest on my list of cruise stocks to buy. However, its net debt is $29.77 billion, or 6.2x EBITDA, which compares favorably to $13.19 billion or 6.5x EBITDA for Norwegian Cruise Line Holdings (NYSE:NCLH).
Another two reasons to consider Carnival stock are its financials and occupancy rates. First, its revenue in Q1 2024 increased by 22%, while it generated a positive operating income of $276 million, 260% higher than a year ago. Second, its occupancy percentage in the quarter increased by 11 percentage points, to 102%. A figure over 100% means that more than two people occupied some cabins daily.
Further, customer deposits reached $6.95 billion at the end of Q1 2024, up 9.4% from $6.35 billion in Q4 2023. More importantly, that was up 87.8% from $3.7 billion in Q1 2022 and 41.8% higher than Q1 2020.
Also, in good news if you follow analyst ratings, 15 out of the 16 analysts covering CCL stock rate it a buy, with a $22.31 price target, 48.1% higher than its current share price.
Of the three, Carnival gives me the least excitement about its future. That said, its business has improved dramatically in the past couple of years.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
