Carnival Corp. witnessed a notable upsurge in its stock price on Tuesday, following an upgrade by Truist analyst Patrick Scholes, a long-standing skeptic of the cruise industry. Scholes, citing robust forward booking trends and improved valuations following a recent price correction, elevated his outlook on the cruise operator and the broader cruise sector.
Scholes upgraded his rating on Carnival (CCL) from "sell" to "hold," a shift that marked a departure from his bearish stance of the past three years. He also revised his stock price target upward, setting it at $17, up from the previous $16.
The analyst emphasized the European market's strength for 2024, with Carnival holding significant exposure to this region. However, he refrained from adopting a bullish stance, expressing concerns about potential competition from privately held MSC Cruises.
In addition to upgrading Carnival, Scholes raised his rating on fellow cruise operator Royal Caribbean Group (RCL) from "hold" to "buy," a change in perspective after a three-year period of neutrality. Furthermore, he upgraded the cruise sector's rating from "neutral" to "positive."
The market responded positively to these upgrades, with Carnival shares surging by 1.6% in premarket trading, and Royal Caribbean's stock rallying by 1.8%.
Scholes explained his rationale for the shift in sentiment, highlighting that despite a period of significant outperformance and strong underlying booking trends, the cruise sector had become overheated a couple of months ago. This led him to downgrade the sector to "neutral." During this phase, Carnival's stock had skyrocketed by 85.5% from the end of March to the end of June, Royal Caribbean shares had surged by 58.9%, and Norwegian Cruise Line Holdings Ltd. (NCLH) had seen a substantial increase of 61.9%. In contrast, the S&P 500 index had registered a more modest gain of 8.3%.
However, since the end of June, the cruise stocks experienced a cooling-off period, with Carnival's shares shedding 20.1%, Royal Caribbean's stock declining by 7.5%, and Norwegian Cruise's shares sliding by 21.4%. During the same period, the S&P 500 edged up by 0.1%.
Scholes maintained his "neutral" rating on Norwegian Cruise, a stance he had held since July. Norwegian Cruise shares made modest gains of 0.8% ahead of Tuesday's opening.
In terms of fundamentals, Scholes noted that industry-wide sales projections for 2024 are currently 55% to 60% higher than the same period in pre-COVID 2019. Furthermore, sales forecasts for 2025 have surged by 100% compared to 2019 levels. While new supply levels for these years are approximately 20% to 25% higher than those in 2019, demand clearly continues to outpace supply.
Consequently, Scholes asserted that Wall Street's current consensus earnings expectations for 2024 and 2025 appear "too conservative," particularly for Royal Caribbean.
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