Don't You Dare Buy the Cheapest Cruise Line Stock

They say you get what you pay for, and that's pretty apparent when it comes to cruise line stocks. Stack up Norwegian Cruise Line (NYSE: NCLH) against larger rivals Royal Caribbean (NYSE: RCL) and Carnival (NYSE: CCL) -- and even river cruise leader Viking Holdings (NYSE: VIK) for good measure -- and one of them stands out for its low relative valuation.

Pick a metric, any metric. Norwegian is, in theory, the cheapest. But that doesn't make it the best stock. You could have said that a year ago, too. How did that work out?

NCL also stands out from the pack for some distinctively bad reasons. The one head-shaking reason I want to start with is a chart. NCL isn't just lagging its peers' share performance over the past year. It's the only cruise line stock trading lower during that time.

NCLH data by YCharts

Sliding more than 20% as the three other cruise line stocks have posted double-digit percentage gains isn't a good look. It's proof that a rising tide doesn't lift all ships.

NCL is textbook cheap. Let's start with forward earnings. This is the P/E ratio for all four stocks based on what analysts believe each company will earn in fiscal 2026. If this was a limbo contest, NCL would win.

• NCL: trading for less than nine times forward earnings.
• Carnival: 12 times forward earnings.
• Royal Caribbean: 18 times forward earnings.
• Viking: 22 times forward earnings.

Image source: Getty Images.

Head over to the other end of the income statement. NCL also stands out for its lowest trailing revenue multiple relative to its market cap. Let's go over the revenue multiples of all four companies.

Market cap divided by revenue for each stock:

• NCL: 1.1.
• Carnival: 1.7.
• Royal Caribbean: 4.9.
• Viking: 5.3.

That's just the tip of the iceberg

If you're a value investor, it's understandable if you'd want to put NCL under the microscope. A stock in a growing industry with a forward P/E in the single digits is going to turn heads. Don't let that get you dizzy.

Some of the most frustrating stocks are the ones that seem too cheap to be true. On the surface, NCL appears to be a value trap. It trades at multiples well below its peers. I haven't delved into it yet, but NCL is also at the back of the pack when it comes to margins. After all, when it trades at half the forward earnings multiple of Royal Caribbean but less than a quarter of its revenue, it's clearly lacking the ability of its closest competitor to convert more of its sales to the bottom line.

Where does NCL stand out? Viking is growing a lot faster than the other three stocks, justifying its market premium. Carnival and Royal Caribbean pay dividends, wooing income investors. But if it just comes down to the lowest valuation metrics, that's more of a surrender than a victory lap. White flags can also be red flags.

The rub is that I'm not prepared to give up on NCL's chances to run with its more successful -- and, over the past few years, more lucrative -- seafaring competitors. The buoyant industry dynamics should eventually lift even the weakest ship.

Viking has the opportunity to follow in the footsteps of Carnival and Royal Caribbean this earnings season. Those companies offered up fourth-quarter revenue growth that more than doubled their year-over-year performance in the third quarter, three months earlier. NCL is in a similar situation. After NCL posted 5% top-line growth in the seasonally potent third quarter, Wall Street pros are targeting an 11% increase for the fourth quarter, which it will announce later this month.

Can NCL prove itself worthy? Can a strong report lead to sustainable upticks? Can the industry laggard turn around like its peers, transforming headwinds into tailwinds? The market is waiting for NCL to stop acting so cheap. If that happens, you won't mind paying up for something good.

Rick Munarriz has positions in Royal Caribbean Cruises and Viking. The Motley Fool recommends Carnival Corp. and Viking. The Motley Fool has a disclosure policy.