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Royal Caribbean expands and gains from under-penetrated markets

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Low market penetration

Cruises still have a small share of the total tourism industry compared to land-based vacation alternatives. The global cruise industry had only 240,000 cabins in 2013, which is less than 2% of worldwide hotel rooms. However, companies in this industry have higher growth potential since they operate in an industry with low penetration rates in key markets.

Even in North America, where cruises are well-established, market penetration is as low as 3.4%. In Europe, the second-largest cruise destination, penetration is even lower, at 1.2%. Market penetration is calculated as the number of annual cruise guests as a percentage of the total population.

The fact that a significant portion of guests are first-time cruisers is an opportunity for companies offering cruise services—especially the three big players, including Royal Caribbean Cruises (RCL), Carnival Corporation (CCL), and Norwegian Cruise Line (NCLH), which could gain from the industry’s long-term growth potential. The growth will, however, depend on the cruise types, services, and amenities provided by these companies to satisfy the vacation needs of their guests.

Royal Caribbean is all set to take advantage of this opportunity with its six global brands. It continues to expand operations with an additional eight ships planned to enter service by 2018. Five of the eights ships will be part of its biggest brand, Royal Caribbean International, and the cost of these ships was estimated at $6 billion.

To gain exposure to stocks in the growing cruise industry, you can invest in stocks directly or in ETFs such as the PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ), the PowerShares Dynamic Large Cap Growth Portfolio (PWB), and the Consumer Discretionary Select Sector SPDR Fund (XLY).

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