Carnival Corp. Shares Surge as Truist Analyst Upgrades Cruise Sector

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Shares of Carnival Corp. experienced a significant surge on Tuesday following an upgrade by Truist analyst Patrick Scholes. Scholes, who had been bearish on the cruise operator and the overall cruise sector for the past three years, cited strong forward booking trends and improved valuations after a recent pullback in price.

Upgraded Rating for Carnival Corp.

Scholes raised his rating for Carnival Corp. (CCL) to hold, accompanied by a slight increase in the stock price target from $16 to $17. He noted that the European market is showing the greatest strength for 2024, in which Carnival has significant exposure. However, Scholes refrained from a bullish outlook due to concerns about competition from privately held MSC Cruises.

Royal Caribbean Group also Receives Upgrade

In addition to upgrading Carnival Corp., Scholes also boosted his rating on fellow cruise operator Royal Caribbean Group (RCL) to buy. This upgrade comes after maintaining a hold rating on the stock for the past three years. Furthermore, Scholes elevated the cruise sector’s rating from neutral to positive.

Market Response

The upgrade by Scholes triggered positive market response, with Carnival Corp. shares rising by 1.6% in premarket trading and Royal Caribbean Group’s stock rallying by 1.8%. Scholes expressed his confidence in the upgraded ratings to clients, stating, “It didn’t take us a long time to get back on the (bull) train.”

Prior Market Sentiment

Scholes explained that despite strong underlying booking trends, he previously downgraded the cruise sector to neutral two months ago. This decision was based on concerns about the cruise stocks being too hot for his liking, following a period of massive outperformance.

Cruise Stocks Rebound: Time to Set Sail Again

Cruise stocks, including Carnival, Royal Caribbean, and Norwegian Cruise Line Holdings Ltd., experienced a massive surge earlier this year. From March to June, Carnival’s stock skyrocketed by 85.5%, Royal Caribbean shares soared 58.9%, and Norwegian Cruise Line shares ran up 61.9%. In comparison, the S&P 500 index tacked on a modest 8.3% during the same period.

However, as Scholes points out, these cruise stocks have since cooled off after reaching their peak in July. But now, Scholes suggests that it’s time to reconsider investing in this sector once again.

Since the end of June, Carnival has seen a decline of 20.1% in its shares, while Royal Caribbean and Norwegian Cruise have experienced drops of 7.5% and 21.4%, respectively. On the other hand, the S&P 500 has only edged up by 0.1% during this time.

Scholes is maintaining his neutral rating on Norwegian Cruise, which he has had since July. In anticipation of this news, Norwegian Cruise shares have already seen a modest increase of 0.8% ahead of Tuesday’s market open.

When it comes to fundamentals, Scholes highlights that industry-wide sales for 2024 are expected to be 55% to 60% higher than the same period in pre-COVID 2019. Moreover, sales for 2025 are projected to be double that of 2019. While there is an increase in supply anticipated for these years (about 20% to 25% higher than 2019 levels), Scholes believes that demand continues to surpass supply.

As a result, Scholes asserts that Wall Street’s current consensus earnings expectations for 2024 and 2025 are “too conservative,” particularly for Royal Caribbean.

It seems that the cruise industry is ready to set sail once again, and investors should keep a close eye on these stocks as they navigate the post-pandemic world.

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