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Rough Waters Ahead, But We See Value in This Cruise Line

Jaime M. Katz, CFA

Jaime Katz: We recently assessed the global supply and demand profile for Carnival, Royal Caribbean, and Norwegian.

For the North American market, we expect supply could grow faster than demand in the near term. However, age demographics, the rising wealth effect, and spending preferences of the millennial cohort support faster demand growth ahead. We believe that after 2020, North America should be in a net demand position.

For the European market, risks still exist. The European population is set to shrink over time, unemployment remains high, and there's no demand growth from an echo boom generation. Our forecast implies that supply is ahead of demand and could remain that way over the next decade.

As for China, strong growth ahead remains. Of the 204 million outbound Chinese travelers we anticipate in 2025, we forecast more than 7 million will be cruising. China should be in a net demand position by the end of 2019 as brand awareness takes hold, ultimately tipping the global supply/demand equilibrium favorably.

Near-term pressure from foreign exchange, oil prices, and geopolitical events shouldn't weigh on the long-term normalized earnings potential of the cruise companies. We see Norwegian shares as the most undervalued of all the operators, trading below 10 times 2017 earnings and deep in 4-star territory.