The cruise industry has been rocked by the coronavirus shutdowns, but Credit Suisse is making a bold bet that the stocks of two major players will surge over 50% and lead the industry’s eventual recovery.
- The firm initiated coverage of the big cruise operators on Thursday, assigning outperform ratings for Royal Caribbean and Norwegian, which have seen their shares fall over 70% so far in 2020.
- Credit Suisse gives them price targets of $67 per share and $21 per share, respectively, implying upside of over 50% for both stocks based on Friday’s closing prices.
- While coronavirus will likely have a “lasting impact” on the industry, “the unmatched value proposition” of cruise lines will be a “driving force behind a recovery,” analyst Benjamin Chaiken wrote in a note to clients.
- Cruises have been suspended and big operators have gone into survival mode, raising liquidity to cover their cash burns, as their stocks hit all-time lows.
- Earlier this month, Norwegian raised $2.4 billion including a $400 million investment from private equity giant L Catterton, which believes that “there’s no question” loyal cruisers will “want to get back on the water” and the industry “will bounce back.”
- “At this point, we think operators have close to a year or more of liquidity in a zero revenue environment,” Chaiken said, adding that this removes the “guessing game” for when cruises will return.
- With cruise lines aiming to resume sailing by August—even before a potential vaccine for coronavirus, customers will also return in droves, Credit Suisse predicts. There is a high degree of repeat cruises and customer loyalty in the industry, analysts point out.
- The firm found that 55% of cruise customers are opting for cruise credit rather than full refunds in cash: “We think this is a very powerful data point highlighting the resiliency in the product, and speaks volumes in terms of future demand for the industry,” Chaiken said.
“With the risk of a liquidity crunch partially priced in, we think current levels offer an attractive entry point,” Credit Suisse told clients.
After Credit Suisse published its research on Thursday, shares of Royal Caribbean and Norwegian jumped 6.4% and 9.8%, respectively.
WHAT TO WATCH FOR
Credit Suisse also initiated coverage of another major cruise line, Carnival Corp. on Thursday. Whereas it sees big upside for Royal Caribbean and Norwegian, the firm gave Carnival a neutral rating with a price target of $12—implying a 17% decline from Friday’s closing price of around $14.50 per share. Out of all three major cruise operators, Credit Suisse says Royal Caribbean will be the standout performer going forward. On Wednesday, Royal Caribbean reported its first-quarter earnings, which showed a wider-than-expected loss. The company said that it expects to post a net loss for 2020.