Carnival Corporation (NYSE:CCL) and Royal Caribbean Cruises Ltd. (NYSE:RCL) are the two most active stocks in the Resorts & Casinos industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CCL to grow earnings at a 12.97% annual rate over the next 5 years. Comparatively, RCL is expected to grow at a 14.43% annual rate. All else equal, RCL’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Carnival Corporation (CCL) has an EBITDA margin of 48.06%, compared to an EBITDA margin of 32.8% for Royal Caribbean Cruises Ltd. (RCL). This suggests that CCL underlying business is more profitable. CCL’s ROI is 9.40% while RCL has a ROI of 8.10%. The interpretation is that CCL’s business generates a higher return on investment than RCL’s.
The value of a stock is simply the present value of its future free cash flows. CCL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.99. Comparatively, RCL’s free cash flow per share was +2.83. On a percent-of-sales basis, CCL’s free cash flow was 3.24% while RCL converted 7.16% of its revenues into cash flow. This means that, for a given level of sales, RCL is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CCL has a current ratio of 0.20 compared to 0.10 for RCL. This means that CCL can more easily cover its most immediate liabilities over the next twelve months. CCL’s debt-to-equity ratio is 0.38 versus a D/E of 0.79 for RCL. RCL is therefore the more solvent of the two companies, and has lower financial risk.
CCL trades at a forward P/E of 15.30, a P/B of 1.97, and a P/S of 2.76, compared to a forward P/E of 14.44, a P/B of 2.75, and a P/S of 3.06 for RCL. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CCL is currently priced at a -6.66% to its one-year price target of $70.61. Comparatively, RCL is -4.35% relative to its price target of $129.28. This suggests that CCL is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for CCL and 1.70 for RCL, which implies that analysts are more bullish on the outlook for CCL.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CCL has a beta of 0.71 and RCL’s beta is 1.00. CCL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. CCL has a short ratio of 2.80 compared to a short interest of 2.73 for RCL. This implies that the market is currently less bearish on the outlook for RCL.
Carnival Corporation (NYSE:CCL) beats Royal Caribbean Cruises Ltd. (NYSE:RCL) on a total of 8 of the 14 factors compared between the two stocks. CCL is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, CCL is the cheaper of the two stocks on book value and sales basis, CCL is more undervalued relative to its price target. Finally, MGM has better sentiment signals based on short interest.