Two Cruise Lines to Buy and One to Sell, According to One Analyst

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Cruise lines are trading down along with the overall market on Wednesday, but

Carnival

is seeing deeper losses than peers

Royal Caribbean Group

and

Norwegian Cruise Line Holdings

following a doubt take on the former from

Wells Fargo

—at least for now.

Analyst Daniel Politzer initiated coverage on all three US cruise stocks on Wednesday. He is optimistic about the sector, which he calls “one of the few remaining recovery stories” among consumer stocks, citing his “expectation for improving fundamentals in the coming quarters.”

The industry received positive news on Wednesday, when the Centers for Disease Control and Prevention lifted its travel health advisory for cruise ships. The move means travelers must determine their own Covid-19 risk assessment when traveling on a cruise ship, the CDC said.

Politzer’s optimism doesn’t extend to

Carnival

(CCL), which he rates at Underweight with a $21 price target. As is so often the case recently, blame the Russian invasion of Ukraine. Politzer is concerned by the company’s company’s international footprint—historically North America has accounted for less of its business peers—”which can be a challenge during periods of international footprint.”

He also worries about Carnival’s pricing power. Carnival is set to increase capacity (ie new ships and berths) by 5.7% this year, its highest level in more than a decade, but yielding, or pricing, has lagged on added capacity. “With pricing a key driver for cruise line stocks (higher yields flow straight to the bottom line), we see less opportunity for Carnival to achieve outsized” earnings growth relative to peers, he writes.

That said, he notes that if the situation in Ukraine were to resolve, Carnival could also see a bigger bounce back that other cruise lines.

Yet absent a resolution, Politzer is more bullish on Royal Caribbean (RCL) and Norwegian (NCLH), starting coverage of both with Buy ratings and price targets of $93 and $27, respectively.

For Royal Caribbean, he highlights the company’s industry-leading technology and pricing power, relatively high exposure to North American market, and the fact that it hedges fuel exposure, which should offer some protection from the recent spike in oil prices.

In terms of Norwegian, Politzer likes its “smaller and more nimble fleet” as well as new ships that allow it to command premium prices.

Carnival is off 1.5% to $19.63 at recent check, while Royal Caribbean is roughly flat and Norwegian is down 0.1% to $21.17.

Cruise lines as a whole were understandably hit hard throughout the pandemic, and while travel restrictions have been lifted in the US and some other western nations, they persisted elsewhere in the world. Furthermore, while the threat of Covid-19 appears to be waning, the threat of new variants has kept pushing out the group’s recovery.

Analysts as a whole aren’t ready to pronounce smooth sailing ahead: Norwegian is the favorite of the three, but still just 41% of analysts tracked by

FactSet

have a Buy rating or the equivalent on the shares, though none are bearish. Thirty-five percent are bullish on Royal Caribbean, and Carnival is the laggard, with just 32% of analysts rating it Buy, and five bears.

Write to Teresa Rivas at teresa.rivas@barrons.com