The Stock of Carnival Climbs After a Long-time Bear Says to Stop Selling

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.

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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.

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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.

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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."

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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%.

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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%.

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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%.

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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.

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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.

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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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