Carnival VS Royal Caribbean: Who is More Profitable?

Carnival vs Royal Caribbean—who really delivers the better cruise experience? In this video, we break down what sets these two cruise giants apart, from onboard atmosphere and amenities to pricing, value, and overall customer experience.

You’ll get an honest look at what each brand does best, where they fall short, and which one might be the better fit for your next vacation. Whether you’re planning a trip or just enjoy smart brand comparisons, this cruise showdown has some surprising takeaways.

TRANSCRIPT:

Is the cruise line industry profitable? Let me walk you through two companies, Carnival versus Royal Caribbean. We're going to explore their profits, their invested capital, their return on that invested capital, their free cash flow, their growth rates, and ultimately their valuation out there in the market as it pertains to their price to earnings ratio. I know I just said a bunch of nerdy things, but this is going to be really exciting.

And what we find and what we discover at the very end is going to surprise you. So you're definitely going to want to stick around for that. But let me just set the stage here by creating two columns, one for CCL, that's the ticker symbol for Carnival, Carnival Cruise Lines.

This is a publicly traded company. And then we will also look at RCL, which is the ticker symbol for Royal Caribbean. So when I was on this cruise, because I'm a nerd, I was on this boat for nine days.

And I thought to myself many times, who is more profitable Carnival or Royal Caribbean? And especially when we docked at similar ports, both of the cruise ships were right next to each other. And I thought, wow, okay, this cruise ship is pretty nice. We got the slide.

We got this, they have that. I wonder who makes more money. And that's what I'm going to walk you through right now.

So we're going to look at these two companies on a trailing 12 month basis. As of their last reporting date, today is July, 2024. And we're going to evaluate these numbers in billions of US dollars.

All right. So let's go ahead and walk through the line items of our analysis. We have revenue.

This line item represents the income that is generated from these cruise ships when they're selling tickets to the cruise and all the other offshoot activities that make up the revenue of the business. This line item right here represents $23.4 billion for Carnival. All right.

So that's how much they do in revenue. And I'm going to walk you through the numbers for Carnival first, and then I'm going to come back and I'm going to compare that to Royal Caribbean. So I'll fill that in next.

And then at the end, I'm going to do this analysis and you're going to be like, oh my gosh, I had no idea. So let's keep going here. We have gross margin.

So if you take the cost of goods sold and you net that against revenue, you end up with gross margin, also known as gross profit. And remember in cost of goods sold, we have items such as direct labor, material costs, all the supplies, all the food, everything else that goes into delivering the revenue for the company. That's in cost of goods sold.

You net that out, you end up with gross margin. So Carnival, they're able to produce $8.4 billion on their revenue and gross margin, which represents 35.8% when you look at gross margin as a percentage of revenue. So when you're doing an analysis, one helpful thing is to express line items as a percentage of revenue, just so you can compare things apples to apples.

That's going to be really helpful, especially when we get into Royal Caribbean and we do our side-by-side. Let's keep going because we're not done. Gross margin isn't the end-all be-all as it pertains to profit because the company is going to have operating expenses.

For example, G&A payroll, sales and marketing costs, professional fees, insurance, and other costs associated with running the business. So when you take operating expenses and you net that against gross margin, you end up with some variation of profit. Now we're going to look at EBITDA.

This represents earnings before interest, taxes, depreciation, and amortization. The reason why EBITDA is nice when you're comparing companies to each other is because this number ignores the capital structure of the business because you're excluding interest expense and it doesn't account for their depreciation and amortization on their net property, plant, and equipment. So it gives us a more of an apples to apples comparison.

So Carnival is able to generate $5.3 billion of EBITDA compared to their revenue, which when we express it as a percentage of revenue, it is 22.4%. Now, if you're following along, you can have a spreadsheet open up and you can just go line by line with me and do the math, and it'll be really helpful and it'll allow things to sink in and settle into your brain when you do this together with me. Or you could just do it on a piece of paper with a calculator, but essentially I'm just taking EBITDA, $5.3 billion, and I'm dividing it by $23.4 billion to express it as a percentage of EBITDA. That's what I'm doing here.

Let's keep going. Another way to look at profit or earnings is to evaluate the operating income of the business. This represents the amount of profit that the company earns from its normal operations.

For Carnival, it's $2.8 billion. Next, we have net operating profit after tax. So what I did here is I just applied a 21% corporate tax rate to get down to net operating profit after tax.

Taxes can be really nuanced for companies because they may have deferred taxes or credits or other items that impact tax. So in order to make it apples to apples, I just applied a 21% corporate tax rate to operating income, and then that nets out to $2.2 billion after tax.

Then if we look at Nopat as a percentage of revenue, the company earns 9.6%. Now, what is a good profit margin for most businesses? If we just look at the average company, the answer is around 10%.

So if you are significantly below 10% in your business, you may be in a very competitive industry where there are a lot of competitive forces that drive this down, or you may be underperforming the overall market. So understanding this compared to your industry and your competitive set is really important. So that's the income statement.

Let's look at the balance sheet and the statement of cash flows along with growth rates to finish up our valuation here. So next, we want to look at their invested capital. Invested capital is computed by summing net property, plant, and equipment, and working capital.

So for Carnival, they are required to invest $37.5 billion in net PP&E and working capital in order to generate this stuff up above. So this is the amount of capital that is required to run the business, and that is trapped in the business.

So if you're able to lower this number, but still generate high returns, your valuation is going to be much higher compared to your peers.

Because you'll see here next, when we look at return on invested capital, which is computed by taking NOPAT, net operating profit after tax, and dividing that by invested capital, for Carnival, they earn 6% returns on their invested capital.

And don't worry, I'm going to come back through and I'm going to walk through each of these line items and describe the meaning behind the numbers here in just a minute. I just want to get everything up on the board here so we can get to that point.

Next, we look at free cash flow. If you go to the statement of cash flows and you take cash from operating activities and you deduct CAPX, you'll arrive at free cash. And for Carnival, it's 1.6 billion.

This represents the amount of cash that's available to either pay down debt, to return to equity providers, or to reinvest in the business. A really important number because check this out, profit is not the same thing as cash flow.

I say this all the time because I want this to sink in to everybody's heads out there because I work with so many companies.

That's what I do. I turn around and grow businesses. And when I'm working with these companies, oftentimes they're only measuring profit.

Well, guess what? There's a big discrepancy between profit and cash flow because profit doesn't include things like changes in networking capital and CAPX.

So you can definitely go out of business if you're just watching net operating profit after tax, and you're not looking at free cash flow. This is the key thing to evaluate in a business.

This also drives the value of the business because the intrinsic value of a company is the present value of all its future cash flows. And that's how you come up with that valuation is through free cash flow.

All right, let's keep going. Free cash flow as a percentage of revenue is 6.8%.

And then if we evaluate the price to earnings ratio, this doesn't necessarily indicate the true value of the business. It just shows us how much investors are willing to pay for every $1 of earnings that the business is able to generate.

And for Carnival, investors are now willing to pay 24.2 times of a price compared to their earnings.

This is their PE ratio, and this is what the stock is currently trading at as of the recording of this video.

We're not done, but we're almost done. We have growth over the next five years, and we have growth over the last five years.

This is really important to understand. For Carnival, it's kind of crazy. When I looked this up online, I had to blink twice and double check, but it is 271%.

So they're looking at nearly tripling over the next five years. And then the growth over the last five years is negative 26.7%.

Think about COVID, right? COVID absolutely decimated the cruise line industry because nobody was cruising when there were lockdowns.

All right. So that's Carnival for you.

We're not done. Let's move over to Royal Caribbean and see who is the better performer here from a financial perspective.

All right. I'm going to go through this line a lot faster. We have revenue of $14.7 billion.

So Royal Caribbean, they have fewer ships and they do less revenue compared to Carnival. But what's interesting here is that their gross margin is 6.7 billion, or in other words, 45.5% of their revenue.

So yeah, they have fewer ships.

They do less cruises.

They have fewer employees, but they're earning a higher margin on their revenue, which is great. I mean, it's less ships to maintain and to wash and employees to have and manage and just less headache.

And they're able to generate quite a bit more gross margin compared to the rival here, Carnival. So Carnival beats them on scale, but they don't beat them on margin. Let's see how everything else stacks up though.

EBITDA, they pretty much catch up, which means that Royal Caribbean is able to compete with the lower cost structure and therefore they can earn $5.1 billion of EBITDA on 14 billion of revenue compared to Carnival, which generates pretty much the same amount of EBITDA, but they have to do a lot more work to get there.

So this EBITDA for Royal Caribbean is 34.4%, right? So a lot higher. Operating income going down the line, 3.3, which is a great number because I love three.

So there's two threes in that. Net operating profit after tax, 2.7 bill and 18% net operating profit after tax as a percentage revenue. So every dollar that flows into Royal Caribbean, they're able to capture 18 cents of that, right? 18% here.

All right, let's go down below and look behind the curtain. 26.2 billion. And this is where a lot of companies, they ignore this whole section.

They're not looking at the balance sheet and the statement of cash flows. They're just solely focused on profit. If this is you, you have to understand how this stuff works so you can compute all this.

If you need help with learning how to read financial statements and understand the story behind the numbers. And if this has you excited and you're like, yeah, I want to get into how to do all this. I want to build better financial skills.

I have programs available for you at byfiq.com. The fundamentals of finance is a great starter course. And then if you want to up your game, you can take the financial pro. So those courses are available if you want to increase your skills.

Let's keep going here. Return on invested capital for Royal Caribbean is 10.1%. And then free cash flow is 0.6 billion. And then when we look at free cash flow as a percentage of revenue, it's 4.1%. I'll keep going and then I'll come back to this, okay? Because there's something really important here that's happening below the line.

PE, the P ratio for Royal Caribbean is 16.9x. I'm sorry you have to look at the back of my bald head every time I'm writing on the board. That's the part of it. And I'm probably blinding you with the shine off my forehead here.

Hey, I can't help it. I'm bald. It's funny.

Some people are like, Mr. Clean, Mr. Clean. I'm like, yeah, Mr. Clean. Ha, good one.

Never heard that before. All right. Let's keep going here.

Growth over the next five years for Royal Caribbean is 30.3%. And their growth over the last five years is negative 31.4%. So even worse than their buddies over here, Carnival. All right. Let me switch colors.

Go to red and let's evaluate what the heck do these numbers even mean? All right. And you're going to want to stick around because at the end, that's when I'm going to deliver the punchline. We're like, yes, I got it.

Okay. Now I'm going to be the star at the dinner table because I'm on one cruise line compared to the other and which one has a better strategy. All right.

Let's get nerdy here. So let's look at revenue. We talked about this along the way.

Okay. Carnival wins. Ding, ding, ding.

They do more revenue so they can pump up their chest and they can say, oh, we're bigger. We're the best here. We're the biggest cruise line out there.

But when it comes to margin, this is really what's important. Royal Caribbean is definitely crushing Carnival. So think about their pricing strategy.

Carnival is the low cost provider. They're trying to compete on low cost versus Royal Caribbean is trying to compete on differentiation. So there's two different strategies that they're pursuing here.

So you can see Royal Caribbean, yes, they're able to capture more profit along the line and that trickles down. Their EBITDA is much higher compared to Carnival and their net operating profit after tax is much higher compared to Carnival. So differentiation is a key here.

Okay. This is the strategy and this is how you take a strategy of a business, position yourself in the marketplace to capture higher profits. I talk about this stuff all the time on my podcast, in my courses, when I'm working with companies.

Strategy plus finance drives value. And this is illustrated right here. Now down below, what's interesting is that the return on invested capital over at Royal Caribbean is actually 10% compared to 6%.

So they're beating them by four percentage points as it pertains to the return on invested capital. So think about it for these cruise lines, they have to go out there and they have to build these massive ships, which requires a ton of capital outlay and they have working capital. What's interesting though, is that Carnival has negative working capital because think about it, they're collecting all this money up front before somebody even cruises.

And therefore that gives them an advantage from their capital base. So the cruise line is kind of interesting there with their negative working capital. Something to point out, something to check out if you're interested in this, just go look at their numbers and their full financial statements.

All right. But then when we get down to free cashflow, this right here is concerning because free cashflow as a percentage revenue for Royal Caribbean, it drops. So you may wonder, okay, well, how's that possible? It's possible because they have a lot of CapEx going out the door, meaning that they're taking their cash and they're reinvesting it into capital expenditures, or they're not managing their working capital as well as they should be.

All right. So this is a problem compared to Carnival because free cashflow ultimately drives value. So Royal Caribbean hasn't beat on return on invested capital.

Carnival has them beat on free cashflow and then look at growth, right? So which business would you rather invest in? 30% growth is still great. This means that they're going to be doubling their business here every two and a half years or so. But if Carnival has a strategy in place to like pour gasoline on the growth engine and accelerate sales of the business by three X, then investors are going to be like, yeah, there's a lot more growth opportunity here and a lot more opportunity to grow the value of my stock.

So therefore investors may be this growth combined with this free cashflow. And that's why the PE ratio is 24 compared to 16.9, which means investors are willing to pay a price 24 times greater than their earnings compared to over here. They're only willing to pay 17 X compared to their earnings.

So that's how it all comes down here at the bottom. But when I'm evaluating your company, I like to look at return on invested capital, growth, and free cashflow. And these three things in combination will help you to understand how value is being driven in a business.

The last thing to point out here is that the stock market is usually rational, but not always. So you have to take all these numbers with a grain of salt. And this is where arbitrage comes in.

This is where professional investors, hedge fund managers, and quants out there look at the numbers. They spot discrepancies in value, and then they make investments. So that's the power of knowing how to do an analysis like this.

When you can evaluate a business, understand the drivers, and you can compare companies from one to the next in a certain industry. And more importantly, when you could do this in your own business, if you're a leader making financial decisions on behalf of your company, or you're an owner of a business, you're running a company, being able to do this for your own business is going to be an absolute game changer. This is how you become a value creator, whether investing in public equities or doing this in your private company.

There you go. There's the magic. Now, tonight at the dinner table, you could be the star, or AKA the nerd, by saying, guys, guess what? Did you know that Carnival has Royal Caribbean beat when it comes to revenue? But at the end of the day, Royal Caribbean's a lot more profitable, but Carnival is still trading at a higher price because they're expecting to grow by three X. And then if you look out there in the market, you should anticipate more ads, more aggressive sales campaigns, right? To grow the business as fast.

And they're going to need more investment in their cruise ships in order to drive growth. So when you start tying all those things together and you understand their strategy, bam, the magic happens. All right.

That's all I have for you. Be sure to share this so we can spread the word out there. Thanks for joining me.

And until next episode, take care of yourself. Cheers.