Carnival Corporation (NYSE:CCL), Royal Caribbean (NYSE:RCL), and Norwegian Cruise Lines (NYSE:NCLH) have much to prove before investors can comfortably set sail with any of the stocks, according to UBS analyst Robin Farley.
In a new research note released on Tuesday, Farley outlined recoveries from prior downturns for the cruise line industry in 2001-2002 and the Great Financial Crisis for context on the current path. While declines from 2019 mirror these downturns in many respects, such as steep occupancy declines, there are key differentiating factors to the current crisis.
“The pent up demand for travel and extremely low unemployment rate should be more beneficial for cruise lines than for hotels, but the crushing shutdown has meant a long re-start period that has only partially been able to benefit from the heightened leisure demand, with Covid testing requirements that are still onerous despite the lower rates of Covid onboard ships than on land,” he wrote. “For the cruise names to work, investors need to see a significant pick up in occupancy from the 50% levels in Q1 (and NCLH even below that) while keeping price above 2019 levels as they have in the quarters since restarting – and for the cruise lines to address some refinancing.”
The latter point is a particular sore spot for the firm’s analysis as the condition of balance sheets across the space are far more burdened than they have been in the past. For example, Carnival Corp. (CCL) debt has ballooned to over $30B while Royal Caribbean (RCL) has significant amounts of debt, nearly $6B, coming due in the next year. With interest rates rising, the debt for cruise stocks is likely to only become a more glaring issue in coming years.
Nonetheless, Farley maintained “Buy” ratings on both Carnival Corp. (CCL) and Royal Caribbean (RCL). Norwegian Cruise Lines (NCLH), by contrast, was assigned a “Hold” rating.
Read more on why Goldman Sachs sees cruise stocks as targets to short.