J.P. Morgan: 2 Cruise Line Stocks to Bet on (And 1 to Avoid)

The coronavirus pandemic crisis shows no signs of subsiding, even as a vaccine hits the market. We're still facing tough social lockdown policies, and a number of states (such as California, Minnesota, and Michigan) are enforcing even stricter restrictions this round than before.
It is a major blow to the leisure industry that is still remembered from one of the most difficult years. The troubles restaurants face are becoming more and more urgent, but Corona was a perfect storm for the cruise industry.
Before the pandemic, the cruise industry, which had $ 150 billion worth of business annually, was expected to carry 32 million passengers in 2020. It's all over now. The industry fluctuated over the summer as over 3,000 COVID cases were linked to 123 different cruise lines and 34 people died.
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After such a difficult year, it is useful to take a step back and get an overview of the state of the industry. JPMorgan analyst Brandt Montour has done just that, in a comprehensive look at the cruise industry in general, and three cruise lines in particular.
"We believe that cruise stocks may continue to advance in the near future, largely due to the broader background / advancement of the vaccine. Looking ahead, operators will be doing a lot with the restart / ramp-up of operations in the second quarter of Q1 21 Headwinds, but a significant sequential improvement in revenue / cash flows during this period are likely to dominate history and we believe investors will continue to suffer short-term setbacks through 2022, brought about by a full capacity, near full capacity and a manageable so far Price pressure are marked, "said Montour.
With that in mind, Montour has picked two stocks that are worth the risk and one that investors should avoid for now. Using TipRanks' stock comparison tool, we placed the three side by side to see what the short-term implications are for these cruise lines.
Royal Caribbean (RCL)
The second largest cruise line, Royal Caribbean, remains a top choice for Montour and his company. The company has used its resources to address and manage the challenges of the pandemic, maintain liquidity, and streamline and modernize its fleet.
Maintaining liquidity was the most pressing issue. While the company has resumed some cruises and even received a new ship, the Silver Moon, most operations remain on hold. For the third quarter, the company reported adjusted earnings of - $ 5.62, which is below the consensus of - $ 5.17.
Management estimates the monthly cash burn to be between $ 250 million and $ 290 million. To counter this, RCL reported liquidity of $ 3.7 billion at the end of September. That included $ 3 billion in cash and $ 700 million available through a credit facility. Total liquidity at the end of the third quarter was down more than 9% compared to the end of the second quarter. Since the end of the third quarter, RCL has added over $ 1 billion to its cash position by issuing senior notes for $ 500 million and selling shares, bringing an additional 8.33 million shares of 60 each US dollars were launched.
In his note on Royal Caribbean, Montour writes, “[We] are most constructive about the OW rated RCL, which we believe has the most compelling demand drivers ... its extensive investments in premium new hardware as well as in consumers All the data put RCL in a good position to outperform the industry in terms of revenue metrics, margins and ROIC over the long term. "
Montour supports his obesity (i.e. buy) with a price target of $ 91. That number equates to an upside potential of 30% in 2021. (To see Montour's track record, click here.)
Does the rest of the street agree? As it turns out, the analyst consensus is more of a mixed bag. 4 buy ratings and 6 holds give RCL a moderate buy status. Meanwhile, the stock is selling for $ 69.58 per share, slightly above the average price target of $ 68.22. (See RCL stock analysis on TipRanks)
Norwegian Cruise Line (NCLH)
With a market cap of $ 7.45 billion and a fleet of 28 ships, Norwegian Cruise Line found its relatively small size to be an asset during this time of the pandemic. With a smaller and newer fleet, overhead costs, especially ship maintenance, were lower.
These benefits don't mean the company avoided the storm. Earlier this month, Norwegian announced an extension of its travel policy suspension, which will cover all scheduled trips from January 1, 2021 to February 28, 2021, as well as selected trips in March 2021. These cancellations come because Norwegian revenue has declined - its third quarter return on sales was just $ 6.5 million compared to $ 1.9 billion in the year-ago quarter. The company also reported a cash burn of $ 150 million per month.
To combat cash burn and minimal earnings, Norwegian took steps in November and December to improve liquidity. The company closed $ 850 million in senior debt at a value of 5.875% that matured in November 2026 and completed an offering of common stock earlier this month. The stock offering was 40 million shares at $ 20.80 per share. Together, the two offers raised over $ 1.6 billion in new capital.
It is more positive that Norwegian is preparing for a possible resumption of full service. On December 7th, the company announced a partnership with AtmosAir Solutions to install air cleaning systems on all 28 ships in its current fleet. A filtration technology is used that is known to defeat the coronavirus.
JPM's Montour points out these benefits in his review of Norwegian and sums it up: “This coupled with a relatively newer high-end brand / ship footprint would generally lead us to believe that it is in a good position is to outperform price growth, although demographics of older customers are likely to remain an obstacle through 2021. Ultimately, NCLH is a high quality commodity in the broader cruise industry with a higher beta for a cruise rebound and should see outperformance than that in industry returns and investors looking further out of the risk spectrum. "
Montour gives the stock a target price of $ 30 and an overweight (i.e. buy). Its target implies an upward movement of 27% within a year.
Norwegian is another cruise line with a moderate buy from analyst consensus. This rating is based on 4 buys, 4 holds and 1 sell in the past few months. As with RCL above, the share price here at $ 23.55 is currently above the average target price of $ 23.22. (See NCLH stock analysis on TipRanks)
Carnival Corporation (CCL)
Carnival is the world's largest cruise line with a market capitalization of $ 23.25 billion, more than 100 ships of all brands and over 700 ports of destination. In normal times, that huge footprint gave the company an edge. however, it has now become an expensive liability. This emerges from the company's cash burn in the third quarter, which approached $ 770 million.
Like the other major cruise lines, Carnival has extended its travel resignations or, as the company says, "business interruption". The Cunard Line, one of Carnival's brands, has canceled trips on the Queen Mary 2 and Queen Elizabeth through early June next year. Carnival also ceased operations in the ports of Miami, Galveston and Port Canaveral in February and postponed the inaugural voyage of the new Mardi Gras ship to the end of April 2021. These measures were taken in compliance with the coronavirus restrictions.
Carnival's shares and earnings have suffered deep losses this year. The stock has fallen 60% since the start of the year, despite some recent price rallies since late October. Revenue fell to just $ 31 million in the third fiscal quarter reported in September. Carnival posted a loss of nearly $ 3 billion in the quarter. The company ended the third quarter with over $ 8 billion in cash available, an impressive resource to deal with the difficult situation.
This combination of strength and weakness led Montour to rate CCL stocks with a neutral (i.e., hold) rating. However, its target price of $ 25 suggests a possible upward move of 23%.
Commenting on the Carnival, Montour wrote, “[We] believe that some of the same relative net returns that were seen in 2018-2019 due to their size are likely to come to the fore on the other side of this crisis The CCL Relative Share Discount, the We see lower price growth before the crisis and geographic diversification as the company with the fewest disadvantages in the next few months and are not surprised by the recent outperformance. We believe this will be reversed in 2H21. "
Overall, Carnival has a hold rating from analyst consensus. This rating is based on 10 ratings that are limited to 1 buy, 8 hold and 1 sell. The stock is selling for $ 20.28 and the average target price of $ 18.86 implies a downside potential of ~ 7%. (See CCL stock analysis on TipRanks)
To find great ideas for trading stocks at attractive valuations, visit TipRanks 'Best Stocks to Buy, a newly launched tool that brings together all of the insights into TipRanks' stocks.
Disclaimer: The opinions expressed in this article are solely those of the presented analysts. The content is intended to be used for informational purposes only. It is very important that you do your own analysis before making any investment.
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