Britain's sliding pound may not be keeping passengers away from cruise decks, but it's stinging cruise-ship operators.
Royal Caribbean Cruises shares sank as much as 7 percent Tuesday after the company cut its full-year guidance, citing the impact of fuel prices and -- you guessed it -- foreign exchange. Carnival Corp., which won't report its Brexit-affected earnings until September, fell as much as 3.5 percent in sympathy. The British pound represents around 30 percent of the currency exposure for both cruise lines.
But ignoring currency and fuel movements, Royal Caribbean has so far been delivering on the promises of its "Double-Double" plan, which includes doubling its 2014 earnings per share by 2017 by controlling costs, maximizing revenue per passenger and modestly adding capacity.
Strangely enough, even though Carnival hasn't said it's trying to match its rival's plan, it's on track to do the same -- in part because of its own focus on maximizing revenue per passenger and rolling out initiatives to drive demand.
That growth contrasts with the S&P 500 Index (which includes the two cruise operators), which has seen earnings flatten -- even as the index has soared to record highs. It's now trading on a fiscal 2016 P/E multiple of 18.3, a premium to Royal Caribbean and Carnival at 11.2 and 13.6, according to Bloomberg data.
Wall Street is doing what it can to narrow the discount being applied to cruise lines. Twenty-two of the 28 analysts that cover Royal Caribbean, and 13 of 21 that cover Carnival, have "buy" recommendations on each stock and predict 12-month price gains, on average, for Royal Caribbean and Carnival of 44 percent and 26 percent, respectively.
While fluctuations in currency and fuel prices are short-lived, demand for cruises has remained robust. And passengers are increasingly spending more once on board, on extras such as beverage packages and streaming internet services. Investors selling cruise ships today may be jumping ship prematurely.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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