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Why cruise stocks are still attractive despite coronavirus: analysts

The coronavirus outbreak has taken a bite out of major cruise operators’ stocks over the past month.

But once these concerns wane, shares of cruise companies could be in for smoother sailing, as underlying trends in the cruise industry remain largely positive, according to multiple analysts.

On Wednesday, Argus analysts downgraded shares of Royal Caribbean Cruises to a Hold from Buy and lowered 2020 earnings per share estimates to $10.10 from $10.80.

The firm based its reassessment on the impact of the coronavirus, which has softened demand in the midst of Royal Caribbean’s all-important “wave period” ahead of the spring and summer. This will likely lead to lower net yields for the company over the next three to four quarters, the analysts said in a note Wednesday.

However, a more upbeat assessment of the cruise industry as a whole was embedded within the more bearish near-term call.

“Despite the impact of the coronavirus, our long-term rating remains BUY based on our expectations for continued favorable demographics in the cruise industry,” the analysts said.

Overall, cruise industry trends have been on the upswing for much of the past decade, growing at a compounded annual growth rate (CAGR) of 5.2% between 2009 and 2017, according to a recent Deloitte study, with cruise passengers growing to 12.4 million from 10.4 million during that time. That CAGR was faster than that of other travel-related industries including restaurants, airlines and car rental service, according to the study.

Those industry-wide advances were reflected individually in cruise operators’ stocks. Prior to the coronavirus outbreak, shares of Royal Caribbean had been on a tear in 2019, jumping 36.5% and outperforming against the S&P 500’s near-29% annual gain. Royal Caribbean benefited from strong booking trends heading into 2020, as the company’s fleet modernization efforts and trending locations like CocoCay in the Bahamas helped drive consumer demand.

For peer cruise operator Norwegian Cruise Line, last year’s returns were even better, with the company posting one-year share price appreciation of 38% in 2019.

‘Free pass’

The coronavirus, however, has at least temporarily upended these uptrends. Royal Caribbean’s stock has shed more than 16% of its value so far in 2020, and Norwegian’s shares have dropped 11%.

“We believe until investors get a better sense of the ultimate impact this ‘noise’ will have on the business, they will continue to tread water around these names,” Stifel analyst Steven Wieczynski wrote in a note last week. “If media attention continues to be outsized, could that have an impact on close-in bookings/pricing? Probably so, but we don’t believe this type of ‘noise’ will impact bookings volume for an extended period of time.”

A worker cleans a cabin as passengers from the cruise ship World Dream docked at Kai Tak cruise terminal leave the ship after being quarantined for the coronavirus in Hong Kong, Sunday, Feb. 9, 2020. Several passengers from mainland China on a previous World Dream cruise were found to have the new coronavirus on returning home. (AP Photo/Kin Cheung)

Royal Caribbean has so far nixed 18 cruises in Southeast Asia amid the coronavirus. The company warned of a 25-cent impact to first quarter results, and an at least 65-cent hit to full-year results, due to cruise cancelations and other changes to itineraries. China alone accounts for some 6% of Royal Caribbean’s full-year capacity, the company said in quarterly results released earlier this month.

For Norwegian Cruise Lines, Stifel’s checks suggest cancelations are running close to 10%, or “basically double the normal average,” the firm said. The company is due to release official quarterly results Thursday after market close.

“However, that cancellation number is factually inaccurate, given those cancellations include cancelled itineraries. If a passenger on a canceled sailing decides to take a different itinerary that still incorporates the passenger as ‘canceled’ and a new net booking,” Wieczynski said.

Even given heightened cancellations, Stifel remained upbeat on Norwegian. Stifel maintained a Buy rating on shares of the cruise operator, but reduced its 2020 EPS estimate by about 6% to $5.22.

“We believe NLCH and the rest of the cruise operators are now going to get a ‘free pass’ from investors around 2020,” Wieczynski said. “As long as the coronavirus or other global travel impacts are contained to 2020, we believe investors will look past this ‘headwind’ and focus on the out years.”

“Ultimately, we don’t believe the recent events will have any long-term material impact on the group in general, given what we have seen from the cruise industry in the past,” he added. “We continue to believe the virus/travel-related impacts have been more than priced into shares at this point, setting up an attractive entry point.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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