Redburn upgrades Carnival Crop and Norwegian Cruise Lines as sector ‘has exited intensive care’

Redburn analysts upgraded cruise line stocks Carnival Corp. (NYSE:) and Norwegian Cruise Line (NYSE:) to Buy, with target prices of $23 and $25, respectively, in a note Thursday.

The analysts maintained a Neutral rating on Royal Caribbean (NYSE:), with a target price of $110.

They said the firm was positive on cruise lines pre-COVID, arguing that they benefited from favorable growth prospects and margin opportunity. However, the analysts believe “those factors are stronger now.”

“Today, the sector has exited intensive care, and the fundamental investment case of strong secular growth and margin opportunity is clear,” they wrote in their research piece.

“Longer booking windows and travel restraints mean cruise pricing has lagged leisure hotels, and the ‘discount’ has increased from 20% to almost 40%. Even a 10% reduction in hotel rates and 3% annual cruise pricing growth across 2023-27 would still leave cruise prices at a wider discount than in 2019.”

Redburn analysts noted that travel demand is “extremely strong,” with leisure travel at the core of this strength.

They added that the margin opportunity comes from falling distribution costs, driven by a shift online, which they believe could add 200bp to margins by 2027.

The analysts believe Carnival has been dragged by a slower reopening in Europe, where it has far more exposure than peers, while Norwegian has suffered from its position as the most high-end cruise line, with an older demographic and a more complex, longer cruise product. However, they expect this to unwind.