3 Reasons Cruise Line Stocks Might Be Starting to Sink

To hear the Cruise Lines International Association tell it, the industry never
has had smoother sailing. In a recent survey, the industry's main marketing
group found that 36.1 million Americans plan to take a cruise in the next three
years up from 33 million in 2008. And cruise line passengers fall into the
prized "upscale" demographic: middle-aged college graduates with a median
household income of $97,000. Add to that solid second-quarter earnings for
Carnival Corp . (NYSE: CCL ), Royal Caribbean (NYSE: RCL ) and Norwegian Cruise
Lines, which last month filed an IPO for the second time in nine months and
hopes to trade as NCLH on the Nasdaq later this year. All three cruise lines
have benefited from increased capacity, higher ticket revenue and a boost in
passengers' shipboard spending. But despite these trends, investors are
reluctant to raise anchor on cruise line stocks. Carnival shares set a new
52-week low of $28.96 on Aug. 19. At $30.88, CCL is trading more than 35% below
its 52-week high of $48.14 in January. Royal Caribbean also set a new 52-week
low last week of $22.30. At $23.26, RCL is trading nearly 54% below its 52-week
high of $49.99 in January. The two stocks have several things in common some
positive, some not. Both companies boast low price/earnings-to-growth ratios
CCL is 0.93 and RCL is 0.61, indicators that both stocks are undervalued. They
also pay dividends: Carnival has a dividend yield of 3.4%; Royal Caribbean is a
more modest 0.4%. But both cruise lines also carry a lot of debt: Carnival has
total cash of $557 million compared to total debt of $9.84 billion; Royal
Caribbean has total cash of $551.46 million and total debt of $8.60 billion.
That's a challenge common to the industry. Paying down debt is one big reason
Norwegian Cruise Lines is taking another run at an IPO it hopes to raise at
least $250 million. Here are three reasons that cruise line stocks might be
starting to sink: Regional Disruptions Cruise line earnings are dependent on a
wide variety of factors beyond a company's control foremost among them
political turmoil and bad weather. Revenues from Mediterranean cruises already
have been clobbered due to conflicts in Libya, Tunisia and Egypt. With Hurricane
Irene bearing down on the U.S. Eastern seaboard, more than a dozen ships have
been forced to change or delay itineraries. And CCL is still feeling the pain
from the March 11 disaster in Japan. Fuel Price Volatility While the price of
oil continues to slip, cruise lines still face the scourge of fuel price
volatility. Norwegian Cruise Lines' fuel costs were more the 17% higher in the
second quarter than they were a year ago. Fuel accounted for a bigger share of
RCL and CCL expenses as well. Sluggish Economy Since cruise lines' target
demographic is the affluent consumer, they should take comfort that luxury
shoppers are driving growth in high-end retail stocks. After all, those same
shoppers should boost cruise line profits. But here's the thing: That same
group also is heavily invested in the stock market and well aware of its recent
roller coaster ride. While affluent buyers made nervous by the market's fits
and starts still might plunk down $800 for an irresistible pair of Manolo pumps,
they might pass on that 12-day Mediterranean voyage from Barcelona. As of this
writing, Susan J. Aluise did not hold a position in any of the stocks named
here.