Here's why Goldman Sachs just gave Carnival and Royal Caribbean stocks buy ratings

By Claudia Assis

Cruise operators get a buy nod from a Goldman Sachs team

Shares of cruise companies have surged, but their rally says more about the operators themselves and structural changes in the business than about a surge in travel demand.

That's from analysts at Goldman Sachs, who on Wednesday started covering the stocks of Carnival Corp. (CCL), Royal Caribbean Group (RCL) and Norwegian Cruise Line Holdings Ltd. (NCLH) and picked two of them to bestow a buy rating.

Cruise stocks have had "an impressive run" in the past year, the analysts, led by Lizzie Dove, said in the note. A bear case is starting to emerge, however, based on the idea that prices have peaked and the bull run is over, they said.

Better pricing, however, is "driven by sustainable, structural changes in industry practices and ongoing incremental pricing tailwinds rather than pent-up consumer demand," the Goldman analysts said.

Tailwinds include travel demand that is set to outpace supply; a "halo effect" from new-ship launches; structural improvements in revenue management, such as less discounting; and some land investments yet to bear fruit, the analysts said.

Their buy ratings went to Royal Caribbean and Carnival, with Norwegian shares getting a hold rating.

Royal Caribbean offers "offers best-in-class execution, with the most exposure to incremental pricing tailwinds," the analysts said. The company also has several new "megaships" on order, boosting their return on capital and driving "significant" new demand. Goldman has a $162 price target on the stock, which represents a 23% upside over Wednesday prices.

Carnival is in the late stages of brand and revenue improvements, and its investment in private islands as ports of call is a catalyst for the shares. The analysts forecast Carnival's destination capacity to ramp up from about 5.7 million people last year to about 10 million by 2028. The analysts have a price target of $20 for Carnival, which would be an upside of around 18%.

Norwegian "has made strong headway in the past year," but it remains a show-me story, the Goldman Sachs analysts said. Moreover, "valuation keeps us neutral," they said. The analysts had a $19 price target on Norwegian's stock, representing a 4% downside

Shares of Royal Caribbean have rallied 82% in the past 12 months, while shares of Carnival have more than doubled and shares of Norwegian have gained 48%. That compares with gains of around 34% for the S&P 500 index SPX in the same period.

-Claudia Assis

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03-13-24 1419ET

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