Carnival, Royal Caribbean, and Norwegian Capture Narrow Moats With Better ROICs in View

We are reinstating our narrow moat ratings for Carnival, Royal Caribbean, and Norwegian after taking away the moat designation at the onset of the COVID-19 pandemic. We think the cruise firms capture an economic moat stemming from three sources, including efficient scale, brand intangible asset, and cost advantage. Underlying these sources are factors including barriers to entry, pricing power, and scale advantages that bolster the cruise lines competitive edge. We now forecast ROICs that are even better than the pre-COVID-19 period over our outlook, reaching 18% at Carnival, 17% at Royal, and 13% at Royal at the end of our 10-year forecast versus sub-10% in 2019 (when the firm last held a narrow moat rating) and our 10% weighted average cost of capital estimate.