Icon of the Seas departs Finland on sea trials, Oct 29 2023. Photo: Jouni Niskakoski/Shutterstock
By Joel Leon (Bloomberg) —
The impressive run from cruise-line operators over the past year has room to run, according to Goldman Sachs Group Inc.
Jittery investors that believe the bull run for cruise stocks has reached its peak are overlooking a favorable setup where demand should outpace supply and result in improved prices, according to analyst Lizzie Dove who initiated Carnival Corp. and Royal Caribbean Cruises Ltd. with buy recommendations.
“Investor sentiment is understandably cautious on cruise stocks,” she wrote in a note published Wednesday morning. “However, we believe that fundamental, structural shifts have taken place in the industry driving better business models with several incremental pricing tailwinds still to come.”
Carnival’s stock rose 2.8% in New York, while Royal Caribbean advanced 2.1%. Meanwhile, shares of Norwegian Cruise Line Holdings Ltd., which Goldman started at neutral, were little changed.
The launches of “megaships” — such as Royal Caribbean’s Icon of the Seas, which made its maiden voyage in January — are likely to further fuel cruise demand, according to Dove. Premium pricing also means they have a better return profile.
She expects the jumbo luxury vessels to create a “halo effect” from their “splashy advertising campaigns and ships with a very wide range of amenities measurably catching customer attention.”
Ongoing pricing power, and positive estimates revisions as the industry shows more rational behavior with less discounting to fill spaces on ships will provide a “strong catalyst path” for cruise companies, she added, as will investments in land resort destinations like Carnival’s Celebration Key.
Of the three companies, Dove said Carnival has the has the most favorable set-up for the year. She views the Miami-based company’s guidance as conservative given a larger recovery in occupancy on the horizon as well. Upcoming private island investments should also provide a positive catalyst as destination capacity is estimated to reach around 10 million by 2028.
“Though we do believe Carnival deserves a discount to its cruise peers due to its higher leverage and higher execution risk, we believe the level of discount is unwarranted,” Dove said.
© 2024 Bloomberg L.P.
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