It has been anything but smooth sailing for the cruise industry. The COVID-19 pandemic and the widespread travel restrictions have caused sailings to be suspended, sending shares to record lows. To survive, cruise operators have gone into cash preservation mode, entering into liquidity enhancing credit agreements.
Against this backdrop, investors are hardly lining up to pull the trigger on names within this area of the market. However, five-star analyst Benjamin Chaiken, of Credit Suisse, has a more optimistic view of the industry. He acknowledges that “COVID -19 may be the toughest challenge the industry has ever faced”, with it potentially taking several years to regain pricing parity. That being said, he argues the “unmatched value proposition of the product” will power a rebound, and that the recent weakness presents an attractive entry point with liquidity struggles already built in.
Highlighting the resiliency of the industry, Chaiken said, "The cruise industry has bounced back before from deadly accidents, sudden regulatory changes and storms.” He added, “Additionally, we think the cruise demographic is favorable for a recovery in demand, and could be why 55% of cruise customers, according to our checks, are opting for a cruise credit vs. cash, post COVID -19 disruption. We think this is a very powerful data point highlighting the resiliency in the product, and speaks volumes in terms of future demand for the industry, especially in the context of current sentiment which questions if the product will even exist in the future.”
Taking all of this into consideration, Chaiken points to two cruise line stocks with especially strong long-term growth narratives, initiating coverage of each with bullish ratings. The analyst does remind clients that not all cruise industry players are set to outperform, recommending that investors avoid one in particular.
Using TipRanks’ database, we wanted to see if other Wall Street analysts agree with Chaiken’s calls. Here’s what we found out.
Royal Caribbean (RCL)
With 63 ships carrying approximately 6 million passengers every year, Royal Caribbean counts itself as one of the top cruise ship operators. While COVID-19 has certainly taken a toll on the company, Chaiken believes that when demand recovers, RCL will be a major beneficiary.
The Credit Suisse analyst argues that part of the company’s strength is derived from the location in which it operates cruises. “We think the Caribbean –where RCL is best positioned in terms of capacity allocation and product--could be a bright spot when demand does return. Many Caribbean itineraries require little or no air travel to embarkation, which we think is likely a positive for those with remaining fear over air travel,” he explained. It also doesn’t hurt that “RCL has the ability to market to guests with a shorter booking window.”
Additionally, Chaiken implores investors to take RCL’s performance before the onset of the public health crisis into account. "We think RCL was gaining significant momentum heading into the Coronavirus-led slowdown, with its CocoCay destination (a private island in the Bahamas offering differentiated land-based activities), demanding price premiums and an had been planning an 80% increase in volume in 2020 vs. 2019, prior to the outbreak,” the analyst stated. He added, “RCL finished 2019 at 108% occupancy and reported net yields of 8%.”
If that wasn’t enough, Chaiken expects several potential tailwinds to emerge post-COVID-19. Its acquisition of Silversea added two ships to the fleet and expanded its agent network, providing a tailwind to yields. Cost tailwinds could also be in RCL’s future.
Even though liquidity and cash burn are considered by some to be a cause for concern, Chaiken is optimistic. “RCL recently raised $3.3 billion in secured notes, giving us further confidence that they should be able to manage the slowdown,” he noted.
To this end, Chaiken kicked off his RCL coverage by publishing an Outperform rating. Accompanying the bullish call is a $67 price target, which suggests 55% upside potential. (To watch Chaiken’s track record, click here)
Looking at the consensus breakdown, the bulls have it. RCL’s Moderate Buy consensus rating breaks down into 8 Buys, 5 Holds and 1 Sell. At $60.36, the average price target implies 39% upside potential. (See Royal Caribbean stock analysis on TipRanks)
Norwegian Cruise Line (NCLH)
Comprised of three brands that include Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises, this name operates 28 ships in the Caribbean, Europe, Alaska, Asia, Bermuda and Hawaii. Despite the fact that COVID-19 fears have pushed shares down by 76% year-to-date, Credit Suisse recommends that investors go in on NCLH based on its solid event path and positioning in an expanding segment.
Chaiken points out that NCLH has recently enhanced liquidity in not one, not two, but six different ways. These include receiving a “debt holiday” from its export credit partners, delaying amortization payments which added $905 million of liquidity, an investment from private equity firm L Catterton, as well as share, convertible debt and notes offerings. On top of this, the company already ended 2019 with $1.8 billion of liquidity.
With respect to cash burn, Chaiken estimates “NCLH has a cash burn profile in the $140-150 million per month range”, which gives it two years of runway in an environment with no revenue. It should also be noted that NCLH doesn’t have ship deliveries until 2022, alleviating some of the pressure on the company. "With $4 billion of liquidity, no new ship deliveries until 2022, and our assumption of a return to cruising in August, we do not see bankruptcy on the table,” the analyst commented.
Sure, COVID-19 will most likely weigh on pricing and capacity in 2020, but Chaiken thinks that like RCL, the strong trends witnessed before the outbreak should be considered. “NCLH finished the year at 107% occupancy and reported net yields of 3.6% in 2019. Adjusting for headwinds related to Norwegian Pearl, Hurricane Dorian and Cuba, we think NCLH generated core growth of 5.6% in 2019... we think NCLH was likely ~20 -25% booked for 1H21, as of March 1, providing a layer of pricing stability, even as newly booked sailings potentially see significant pricing deceleration as some cancellations inevitably occur,” he explained.
Adding to the good news, NCLH also stands to benefit from the reversal of the shortened Cuba booking window and improving mix for the former Cuba ships as well as lapping Hurricane Dorian and a technical issue related to Pearl, with these adding a “small layer of stability in a volatile time.”
“We think NCLH offers a differentiated vacation, within an oligopoly, at a significant discount to other land-based alternatives and as such we believe we will see demand for the product come back,” Chaiken concluded.
It should come as no surprise, then, that Chaiken joined the bulls. To start off his coverage, he put an Outperform rating and $21 price target on the stock. Should this target be met, a twelve-month gain of 50% could be in store.
Turning now to the rest of the Street, 7 Buys and 8 Holds have been assigned in the last three months, making the consensus rating a Moderate Buy. In addition, the $16.50 average price target implies shares could surge 18% in the next year. (See Norwegian Cruise Line stock analysis on TipRanks)
Carnival Corporation (CCL)
When it comes to Carnival, the largest publicly traded cruise line, the company has found itself in choppy waters, with Chaiken not expecting smooth sailing anytime soon.
Down 71% since the start of 2020, some might see this decline as representing a buying opportunity. However, in the long-term, Chaiken believes the company will come up short when compared to its peers. The analyst makes it clear that he doesn’t see bankruptcy as being very likely based on the fact that CCL raised $9 billion of liquidity over the last few months. Having said that, this financing could create a problem for CCL as it will almost triple its interest expense.
Looking at the near-term, Chaiken points to its high levels of cash burn as setting the company up for trouble. “From a cash burn perspective, we estimate CCL has a cash burn profile in the ~$1 billion per month range, leaving them with just over nine months of runway in a zero-revenue environment. This compares to RCL of $450-470 million per month and NCLH of $140- 150 million per month,” he stated.
Also problematic, CCL had less momentum going into the year than both RCL and NCLH as its net yields were flat. The most significant issue for CCL, though, is that passengers from Europe make up a substantial portion of its customer base, and Chaiken has less confidence in certain European economies, namely Italy.
Expounding on this, Chaiken said, “Given CCL sources its European itineraries (~30% of capacity) with guests from Europe, in our view it adds an additional layer of risk to the story not present in RCL or NCLH...So while we think CCL will live to fight another day, we think CCL will underperform peers as demand rebounds. In short, we think CCL has greater implicit leverage to continental Europe given they fill their European-based itineraries with customers who live in Europe.”
Bearing this in mind, Chaiken took a spot on the sidelines. Along with his Neutral rating, he set a $12 price target. This target suggests shares could shed 18% of their value in the next year.
The verdict is in, and the rest of the Street agrees with Chaiken. 3 Buys, 8 Holds and 3 Sells add up to a Hold consensus rating. That said, the $19.33 average price target does indicate upside potential, 32% to be exact. (See Carnival price targets and analyst ratings on TipRanks)