Summer Season Looks Promising for Cruise Lines

We are raising our fair value estimates on no-moat Carnival CCL and Royal Caribbean RCL in response to the recent momentum we have seen in deployment planning for the upcoming summer season. For Carnival, we are raising our per share fair value estimate to $24 (GBX 1,740) from $20, while for Royal we are raising our per share fair value estimate to $65 from $60. While constrained by regulations domestically, Carnival and Royal have nimbly pivoted to deploy its fleet abroad in recent weeks, lining up summer sailings starting from the UK, Italy, Israel, Greece, Cyprus, among other ports. With these itineraries selling inventory, the cadence in deployment of hardware implies 2022 capacity could be closer to prior levels, and as such, we have increased our capacity/passenger count for 2022, the primary driver of our fair value changes. We are maintaining our fair value per share estimate of Norwegian NCLH at $27, as the company has just three of its 28 ships set to be deployed starting in July, and we had already modeled an introduction of capacity in the firm’s third quarter.

Despite these lifts, we view cruise shares (CCL, RCL, NCLH) as overvalued, with all three trading at a premium to our fair value estimates. While the cruise lines have implemented changes to embarkation, testing, mitigation, and other tactics with respect to COVID-19 (or other communicable diseases), we don’t think consensus is accounting for the likelihood of higher costs affiliated with COVID-19 protocols that could remain intact once the virus subsides. These costs could hinder the speed at which profit margins recover--specifically, we model EBITDA margin improvement slower than consensus (Visible Alpha). For example, in 2023 (likely to be the first "normal" full year of operation with capacity and occupancy levels restored), our forecast calls for an EBITDA margin of 26% at Carnival, 30% at Royal and 26% at Norwegian, versus consensus 28%, 31% and 26.5%, respectively.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.