Both Royal Caribbean (RCL) , which owns six cruise brands, and Norwegian Cruise Line Holdings (NCLH) , a smaller cruise line that went public in January 2013, have been forging new all-time highs in recent sessions, pushed in part by plunging fuel prices and quarterly earnings that show positive momentum in the industry.
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But while the cruise line stocks have enjoyed substantial gains over the past year, their inflated prices may be teetering on the verge of declines. Royal Caribbean shares are up about 83% from year-ago prices and hit a new all-time high of $80.19 Monday. Norwegian Cruise Line hit its all-time high of $45.93 on Friday, with shares recently up about 34% from year-ago levels.
Carnival's series of mishaps last year, including the Carnival Triumph's power outage in February that left passengers stranded for days at sea in squalid conditions, originally triggered the abrupt selloff in cruise lines. Carnival's damaged brand initially weighed on its cruise line peers before investors started snapping up shares at rock-bottom prices.
While Carnival's second-quarter earnings of 10 cents per share did beat the Street view, the earnings were about on par with the 9 cents per share the cruise line reported the year prior. Carnival is set to report its third-quarter earnings Dec. 18, when analysts expect 19 cents per share in earnings, up from 4 cents last year, according to Thomson Reuters. For the fourth quarter, analysts expect 8 cents per share.
Now even Royal Caribbean -- arguably the strongest cruise line investment with its younger fleet untarnished by the power-outage disaster -- seems ready to deflate after an aggressive rally.
Newly added to the S&P 500 Index (SPY) this month, Royal Caribbean is entering the Chinese cruise market with a new joint venture with Ctrip.com called SkySea Cruises, but its climbing price-to-earnings ratio could easily turn off investors.
Royal Caribbean's recent record-high prices put its forward earnings at 26.3, about twice the price-to-earnings ratio of last year, when a steady rally in cruise-line stocks first ignited. That's similar to Carnival's price-to-earnings ratio of 24 and Norwegian Cruise Line's 23.3.
Analysts expect Royal Caribbean to draw fourth-quarter earnings of 43 cents per share on $1.89 billion in revenue when it reports Jan. 26. That's about double the earnings from a year prior, on the same revenue. Its third-quarter earnings were about on par with the analyst view.
For the full fiscal 2014 year, Royal Caribbean expects earnings of about $3.45 per share, a bit below the analyst consensus of $3.47 per share.
In recent analyst ratings adjustments, Royal Caribbean was downgraded to neutral from buy at Swedbank. Norwegian Cruise Lines was initiated at overweight at Barclays. Carnival was downgraded to neutral from buy at Goldman Sachs.
TheStreet Ratings team rates CARNIVAL CORP/PLC (USA) as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate CARNIVAL CORP/PLC (USA) (CCL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, attractive valuation levels, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."
You can view the full analysis from the report here: CCL Ratings Report