Cruise Companies No Longer Lost at Sea

NEW YORK (TheStreet) -- Tales of a vacation getaway on a rudderless ship without lights, showers or hot meals haven't held back the share prices of Carnival (CUK) and Royal Caribbean Cruises (RCL).

The companies' stocks have far outpaced the benchmark S&P 500 Index's 6% return this year, with Carnival rising 24% and Royal Caribbean up 59%. Both cruise companies touched 52-week highs this month.

Consumers are loosening their purse strings and taking vacations after staying home for the better part of the past two years as unemployment rose. With the economy recovering, North Americans have increased bookings, prompting Goldman Sachs (GS) to upgrade Carnival to "buy" and increase its share-price target to $44 from $36. Some vacationers opted for cruises because they're relatively cheap and perceived to be safer than the hotspot of Mexico, some of whose cities are plagued by drug-fueled violence.

Carnival is the largest cruise operator in the world, with 90 ships and $14 billion in revenue in 2008. Royal Caribbean is No. 2, with 39 ships and nearly $6 billion in revenue last year.

Both companies' shares have fallen since early last week, as the industry was battered by bad news. A fire aboard a Carnival cruise ship with 3,300 passengers caused it to lose power. It was adrift off the coast of Mexico for three days before limping home to San Diego.

Carnival and Royal Caribbean are coming off big third quarters. Carnival reported a 7% rise in revenue to $4.43 billion and a net-income increase of 22% to $1.3 billion, or $1.62 a share. Royal Caribbean's revenue rose 17% to $2.06 billion, while net income climbed 55% to $357 million, or $1.64 a share. The firms gave upbeat forecasts for the balance of the year.

That optimism comes despite a wide range of challenges to the cruise industry, ranging from reports of bed-bug infestation, food poisoning and passengers mysteriously falling overboard.

And what goes unaddressed is the issue of what would happen to the U.S. cruise industry if there is a terrorist attack on a ship, some of which can carry as many as 8,500 passengers. Such an event could scuttle the industry overnight.