The economic trends we saw developing earlier this year have continued, albeit with a little turbulence here and there: U.S. job creation remains solid, unemployment remains low and consumer incomes are rising. While the drag from economic woes in Europe and Asia is a concern, and any economy that relies on the energy industry is hurting (including ours, in part), for the most part American consumers are in better shape than they’ve been in years.

Meanwhile, the inexorable aging of America is fueling growth for any provider of goods and services to older Americans. While healthcare is the obvious beneficiary, so is leisure: companies that profit from more spending on travel, dining, recreation and, well, fun. And few companies fit the bill better than the cruise ship lines.

#-ad_banner-#The cruise industry has already grown rapidly in recent decades — passenger volume has risen at a compound annualized growth rate of about 7% over the past 35 years. And while most U.S. cruises still start in Florida, California or New York, the number of ports in use is expanding; in North America, more than 30 embarkation ports have been established, which puts a port within reasonable driving distance of 75% of the population. Yet only about half of the population has ever taken a cruise, leaving room for more growth.

That growth will be driven by the rise in the number of older Americans with cash to spend on leisure activities, as well as the new wave of cruise ships with resort-like amenities that include bigger cabins, multi-level suites, WiFi access, multiple restaurants and bars, rock-climbing walls, water slides, golfing facilities, spas, health clubs and more.

Norwegian Cruise Lines (Nasdaq: NCLH) is the smallest of the major cruise lines, with 23 ships versus 44 for Royal Caribbean and 99 for Carnival Corp. The company operates under three distinct brands, in increasing order of opulence: Norwegian Cruise Line (14 ships with three more on order), Oceania Cruises (six ships) and Regent Seven Seas Cruises (three ships). 

Smaller size is a virtue in this industry, for two reasons: Norwegian has a strong reputation for excellent service and cuisine, which is of enormous benefit at a time when mass-market cruises have a questionable reputation. While Norwegian goes after the mass market customer, it provides a slightly more luxurious product than its competitors. With a smaller fleet to operate, Norwegian has a better shot at sharpening its competitive edge in this area.
    
The second reason is more basic: when you’re smaller, you have more room to grow. Each ship or route that Norwegian adds packs a greater punch to its bottom line. In a growth industry, that’s a big plus. It means Norwegian may be able to deliver faster earnings growth for longer than its peers.

In fact, that’s exactly what I expect to happen.

In 2016, Norwegian increased its revenue by 39% and earnings by 27%. With new ships coming on line and fuel costs still low, earnings are expected to rise by about 40% in 2016 and 32% in 2017. That strong growth may not be sustained over the long term, but it’s a testament to the company’s potential to expand in a growing market. The company has decent financial strength and growing free cash flow. At recent prices, Norwegian Cruise Lines trades at 12.5 times analysts’ consensus estimate for 2016 earnings per share — a fairly low valuation for a company with the wind at its back.

For an indirect play on the cruise industry, consider Disney (NYSE: DIS), which I’ve recommended in the past and still find attractive at current valuations. While the company’s main profit drivers are its film & television operations — including Pixar Studios, Marvel Entertainment, ABC, ESPN and The Disney Channel — and its theme parks, the company also has a cruise ship line with four ships and two that will come on line in the coming years. 

Risks To Consider: Norwegian Cruise Lines could be hurt by rising energy prices or unforeseen bad news (e.g., a safety or health problem with one of their ships). Disney’s cruise business could be hurt by the same factors, and the overall business is vulnerable to poor performance at the box office, theme parks or cable networks.
    
Action To Take: Buy Norwegian Cruise Lines below $50 and Disney below $100.

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