2 Travel and Leisure Stocks to Buy

Royal Caribbean and Carnival Cruises both offer solid dividends and low price multiples for long-term investors

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Dec 13, 2018
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People love taking to the sea on a big boat. Carnival Corp. (CCL, Financial) and Royal Caribbean Cruises Ltd. (RCL, Financial) are the largest cruise companies in the travel and leisure industry with sales of $18.6 billlion and $9.1 billion respectively.

These ships have everything, and both companies have booked double-digit returns on investment capital. Scale, capital barriers and scarcity in building massive cruise ships continue to prevent new competitors from easily entering the market. Thus, Carnival and Royal Caribbean control the majority of the global market.

Carnival is the largest cruise company in the world, with more than 100 ships on the seas that attract over 12 million travelers each year across brands that include its namesake Carnival Cruise Lines, along with Holland America, Princess Cruises and Seabourn in North America; P&O Cruises in the United Kingdom and Australia; and Aida in Germany. This portfolio brings in a considerable amount of profit as each ship has a passenger capacity over 200,000.

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In the last 12 months alone, Carnival generated over $3.2 billion in net income on $18.6 billion in sales. The company is set to put 18 more ships into action between 2018 and 2022 and, over time, should be able to slightly raise costs to get sales per ship over $200 million. At its current profit rate with 118 ships, Carnival could be earning over $4 billion by 2022. With continued share buybacks factored in, earnings could hit $6 per share. At 15 times earnings, shares would price at $90. If the company is valued based on its historical price-earnings ratio of 22, then the shares would price as high as $130. In the meantime, investors are getting a 3.5% dividend payment and that yield will easily rise over time thanks to earnings growth and share buybacks.

As for Royal Caribbean, the world's second-largest cruise company operates more than 50 ships under the brands Royal Caribbean, Celebrity Cruises, Azamara Club Cruises and CDF Croisieres de France. The company also has significant investments in TUI Cruises (50%), Pullmantur (49%) and Silversea (67%) that may not be fully reflected on the company's value. It generated more than $1.7 billion in net income on $9.1 billion in sales in the last 12 months.

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In May, Royal Caribbean announced its own $1 billion share buyback, which would take off slightly less than 10 million shares at the current price. The company is looking to add more ships to its fleet as well. Combined, the efforts are expected to push earnings over $10 per share by 2020. At 15 times earnings, the stock would price at $150 a share. At 22 times, the industry average, its stock would reach $220 per share.

Maybe one day traveling via a massive ocean liner will be less popular, but considering the cost to build a new ship, it is virtually impossible for any competitor to enter the market and scale quickly. That keeps these two in total control for decades to come.

Disclosure: I am not long or short RCL or CCL.Â

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