Viking (VIK)

Luxury cruise operator Viking (NYSE:VIK) met Wall Streets revenue expectations in Q3 CY2025, with sales up 19.1% year on year to $2 billion. Its GAAP profit of $1.15 per share was 3.7% below analysts’ consensus estimates.

Company Overview

From a single river cruise offering to a fleet of 96 vessels across multiple continents, Viking (NYSE:VIK) operates a fleet of small luxury cruise ships offering river, ocean, and expedition voyages focused on cultural enrichment and destination immersion.

Airlines, hotels, resorts, and cruise line companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted from buying "things" (wasteful) to buying "experiences" (memorable). In addition, the internet has introduced new ways of approaching leisure and lodging such as booking homes and longer-term accommodations. Traditional airlines, hotel, resorts, and cruise line companies must innovate to stay relevant in a market rife with innovation.

Viking competes with premium and luxury cruise operators including Oceania Cruises, Regent Seven Seas, Silversea, and Seabourn in the ocean segment, while river cruise competitors include AMA Waterways, Avalon Waterways, Uniworld, and Tauck. For expedition cruises, the company faces competition from Hurtigruten, Lindblad Expeditions, and Ponant.

A company’s top-line performance can indicate its business quality. Rapid growth can signal it’s benefiting from an innovative new product or burgeoning market trend. Viking’s annualized revenue growth rate of 17.1% over the last two years was weak for a consumer discretionary business.

This quarter, Viking’s year-on-year revenue growth was 19.1%, and its $2 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 15.9% over the next 12 months, similar to its two-year rate. Despite the slowdown, this projection is healthy and indicates the market is forecasting success for its products and services.

Viking’s operating margin has been trending up over the last 12 months and averaged 21.1% over the last two years. The company’s higher efficiency is a breath of fresh air, but its suboptimal cost structure means it still sports lousy profitability for a consumer discretionary business.

This quarter, Viking generated an operating margin profit margin of 30.2%, up 1.1 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Viking has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 18%, lousy for a consumer discretionary business.

Viking’s free cash flow clocked in at $609.4 million in Q3, equivalent to a 30.5% margin. The company’s cash profitability regressed as it was 12 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t put too much weight on this quarter’s decline because capital expenditures can be seasonal and companies often stockpile inventory in anticipation of higher demand, causing short-term swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Viking’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 11% for the last 12 months will increase to 24.9%, giving it more flexibility for investments, share buybacks, and dividends.

Viking reported $3.04 billion of cash and $5.65 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.72 billion of EBITDA over the last 12 months, we view Viking’s 1.5× net-debt-to-EBITDA ratio as safe. We also see its $94.4 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Viking beat analysts’ EBITDA expectations this quarter. On the other hand, its EPS missed. Overall, this was a softer quarter. The stock traded up 1.3% to $73.18 immediately following the results.

Are you wondering whether to buy Viking or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

We cheer for all companies serving everyday consumers, but in the case of Viking, we’ll be cheering from the sidelines. Although the company’s projected EPS for the next year implies the company will start generating shareholder value, the downside is its low free cash flow margins give it little breathing room. On top of that, the company’s operating margins reveal poor profitability compared to other consumer discretionary companies.

Viking’s P/E ratio based on the next 12 months is 23x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $72.06 on the company (compared to the current share price of $73.18).