A Better Way to Play Cruise Ships (STNR, CCL, RCL)
The cruise ship sector is and has been a very interesting play over the past few years; after it became clear that the United States had stemmed its severe economic downturn and consumer spending worries eased, names like Royal Caribbean (NYSE: RCL) and Carnival Cruises (NYSE: CCL) popped sharply higher. You may recall that RCL was trading for less than $6.00; CCL fell to nearly $14.00 as well (566% and 156% pops, respectively).
While the valuations of both companies still look attractive, this is only in light of their high growth rates; these growth rates are predicated on the revamp in consumer spending and the rebound of these companies over the next five years. This means that, while the stocks make great bull trading vehicles and strong swing trade candidates, it is hard to consider them, major long-term holds if you were to buy them at current prices.
Here's a better way to play to rebound in leisure travel, consumer spending, disposable income, and indulgence—Steiner Leisure Limited (NASDAQ: STNR).
Steiner Leisure Limited is provider of spa services, spa training, and spa products on cruise ships and in hotels across the world. It products are sold under the Elemis, La Therapie, Bliss, Remede, Laboratoire Remede, Steiner, and Mandara brands (ask your wife—she'll know these) and it services are sold on Carnival Cruise, Celebrity Cruises, Norwegian Cruise Lines, and Royal Carribean Cruise to name a few. Its land-based operations exist in many Hilton Marriot, Nikko, Planet Hollywood, and Ritz-Carlton hotels.
In addition, the company owns and operates post-secondary schools located in Arizona, Colorado, Connecticut, Florida, Maryland, Nevada, Pennsylvania, Utah, and Virginia.
The real interesting part here is that the company generates over 65% of its revenues and profits from their cruise ship operation, which makes them an ideal proxy for playing the sector; while the stock has also rebounded off of its low, it has a much better looking chart and the fundamental story is not based off of 30-40% growth rates (as with RCL and CCL).
Full disclosure here—this is a thinly traded stock (10-day daily average volume of ~34,000 shares), there are no equity options to hedge your positions with, and the bid/ask spread can often get wide (i.e. liquidity).
With that said let's look at the fundamentals: Steiner Leisure currently trades at 14x earnings, 12.3x forward earnings, and has a 5-year annual growth rate of 10% per year. This equates to a PEG ratio of 1.23, which, while not a super-amazingly cheap stock, still places it on the buy side of the portfolio. Importantly, this also leaves room for upside surprises to earnings and valuation, which RCL and CCL will likely fail to do over the long-term. Note that STNR has surprised on earnings for the past four quarter by an average of 19.65%.
The technical picture looks favorable for STNR as well. The stock has consolidated the sharp uptrend from 2009 and early 2010 and has managed to form a range around the 200-day moving average from roughly $35.00 to $45.00. The stock, 18-day, 50-day, and 200-day moving averages have all recently converged and begun to move sideways. This is likely a period of consolidation and accumulation.
From a bull perspective, shares have support at $39.50, $38.50, $37.50, and $35.00. From a bear perspective, shares have resistance at $42.40, $45.00, and $47.50.
Analysts haven't caught on yet, which is a good thing. Currently 11 analysts have Hold/Neutral ratings on the name, 1 has a Buy/Overweight, and 2 are Sellers on STNR. Given that I typically use analysts' recommendations as inverse indicators, this is a good sign.
Lastly, the company's business mix should be highlighted. While cruise revenues account for the major portion of earnings in an economic upturn, in the downturn the school segment has started to post very interesting and above trend growth as people return for secondary education. While this advantageous bump will smooth over time, the reigns will likely be taken up by the headline segments, which should start to see consumer spending more on luxury goods and services in the next few years.
Long story short—Buy a small starter position in STNR now and scale into more over the next 8-12 months.
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