Shares of Carnival Corp. surged Tuesday after a longtime bear, Truist analyst Patrick Scholes, upgraded the cruise operator and the overall cruise sector, citing strong forward booking trends and after the recent pullback in price has improved valuations.
Scholes bumped up his rating on Carnival CCL, -0.99% to hold, after being at sell for at least the past three years, and nudged up his stock price target to $17 from $16.
He said the European is showing the greatest degree of strength for 2024, and Carnival has the greatest exposure to that market. He stopped short of being bullish, however, given concerns of competition coming from privately held MSC Cruises.
He also boosted his rating on fellow cruise operator Royal Caribbean Group RCL, -1.54% to buy after being at hold for at least the past three years, while bumping the cruise sector’s rating up to positive from neutral.
Carnival shares climbed 1.6% in premarket trading while Royal Caribbean’s stock rallied 1.8%.
“It didn’t take us a long time to get back on the (bull) train,” Scholes wrote in a note to clients.
He explained that two months ago, following several months of “massive outperformance” and despite strong underlying booking trends, “the cruise stocks were just too hot for our liking,” leading him to cut the sector to neutral.
Carnival’s stock had rocketed 85.5% from the end of March through the end of June, Royal Caribbean shares had soared 58.9% and Norwegian Cruise Line Holdings Ltd. shares NCLH, -0.64% had run up 61.9%, while the S&P 500 index SPX had tacked on 8.3%.
“However, the cruise stocks have cooled off since their July peaks…and we are now again recommending the sector,” Scholes wrote.
Since the end of June, shares of Carnival have shed 20.1% through Monday, shares of Royal Caribbean have dropped 7.5% and shares of Norwegian Cruise have slid 21.4%. The S&P 500 has edged up 0.1% during that time.
Scholes maintained the neutral rating he’s had on Norwegian Cruise since July. Norwegian Cruise shares tacked on 0.8% ahead of Tuesday’s open.
Regarding fundamentals, Scholes said industry-wide sales for 2024 are about 55% to 60% above the same time in pre-COVID 2019, and sales for 2025 are up 100% from 2019. And while new supply for those years is about 20% to 25% above 2019 levels, “demand clearly continues to outpace supply.”
As a result, he believes Wall Street’s current consensus earnings expectations for 2024 and 2025 are “too conservative,” especially for Royal Caribbean.