Cruise stocks, the standout performers in the travel-and-leisure sector over the past 12 months, are experiencing a downturn in the 2024 initial trading days as investors take a cautious stance towards last year’s high-performing assets.
In the first two trading sessions of 2024, cruise operators are notably underperforming within the S&P 500 index. Norwegian Cruise Line Holdings (NYSE: NCLH) experienced a substantial 15% decline, marking its most significant two-session drop since early August. Carnival Corporation & plc (NYSE: CCL) and Royal Caribbean Cruises (NYSE: RCL) also face notable decreases, with 12% and 9.3% drops in the early days of the week.
These early losses highlight the heightened expectations from investors for the industry to present new, positive catalysts following a successful 2023. Despite challenges such as increased interest rates and geopolitical concerns, resilient consumer spending habits propelled all three major US cruise stocks to achieve their best annual gains since going public.
Cruise lines encountered significant challenges in the post-pandemic landscape, enduring a stricter journey than many other travel sectors. Prolonged closures, border restrictions, and lockdowns forced cruise operators to cancel departures and, in certain instances, retain guests on board as ports restricted disembarkation. Despite a robust rally in the previous year, the industry’s shares have not fully rebounded to pre-pandemic closing highs.
The cruise industry is set to face increasingly challenging trailing comparisons. The first quarter marks the commencement of “Wave Season,” a period from January to March characterized by seasonally lower occupancy levels. During this time, operators intensify sales promotions to attract price-conscious passengers, adding to the complexities of surpassing previous performance benchmarks.
In the upcoming quarters, non-fuel costs, encompassing areas like fleet maintenance, food, and on-board services, are anticipated to increase, thereby exerting additional pressure on profit margins.
According to analysts such as Melius’ Conor Cunningham, cruise shares still have the potential to be gained. Lower fuel prices and sustained strong demand for sea travel create an attractive setup for the industry in the coming year. The prospect of decreasing inflation and optimism regarding the Federal Reserve engineering a soft landing further support discretionary spending.
In a note to clients, Cunningham highlighted the compelling setup for the cruise industry, stating,
“The natural question to follow is, how is this not peak for cruise? The setup remains compelling, and if inflation breaks lower, there is further margin upside outside of just price.”
In 2023, Royal Caribbean (NYSE: RCL) and Carnival (NYSE: CCL) witnessed triple-digit stock advances, while Norwegian Cruise Line Holdings (NYSE: NCLH) experienced approximately a 64% increase. Carnival, the first central US cruise line to report fourth-quarter financial results, revealed a record booked position into 2024 at considerably higher prices in December. The company also provided full-year profit guidance, which some Wall Street strategists view as conservative.
