JP Morgan: 2 Cruise Line Stocks to Bet on (And 1 to Avoid)
The coronavirus pandemic crisis shows no signs of diminishing, even with a vaccine coming on to the markets. We still face severe social lock-in policies, with many provinces (like California, Minnesota and Michigan) imposing even tougher restrictions on this round than before. It is a heavy blow to the leisure industry which is still in the grip of one of the most difficult years in memory. The difficulties facing restaurants are getting more press, but for the cruise industry, corona has been a perfect storm. Ahead of the pandemic, the cruise industry – which had been doing $ 150 billion worth of business annually – was expected to carry 32 million passengers in 2020. It’s all gone now. During the summer, the industry reeled when more than 3,000 COVID cases were linked to 123 separate cruise ships, and resulted in 34 deaths. After such a difficult year, it’s helpful to step back and take a look at the state of the industry. JPMorgan analyst Brandt Montour has done just that, in a comprehensive review of the cruise industry in general and three cruise line giants in particular. “We believe that cruise shares can continue to dip higher in the near term, overwhelmingly driven by the broader vaccine background / progress. Looking further, operators will face plenty of headwinds when restarting / ramping up operations in 2Q3Q21 , but a significant sequential improvement in revenue / cash flow over that period is likely to dominate the narrative, and we believe that investors will continue to look through short-term obstacles to 2022, characterized by full ramp capacity, almost full occupations, and so far malleable pricing pressures, “Montour opined.Against against this background, Montour has chosen two stocks worth the risk, and one that investors should avoid for the time being. Using the TipRanks Stock Comparison tool, we lined the three side by side to get the near-term discount for these cruise line players .Royal Caribbean (RCL) The cruise line second-largest, Royal Caribbean, remains top pick for Montour and his company. The company has put its resources into meeting and meeting the challenges of the pandemic, increasing liquidity and streamlining and modernizing the fleet. Maintaining liquidity has been the most pressing issue. While the company has resumed some cruising, and even received a new ship, the Silver Moon, most operations remain suspended. For Q3, the company reported adjusted earnings of – $ 5.62, below a consensus of – $ 5.17. Management estimates the cash burn is between $ 250 million and $ 290 million each month. To combat that, RCL indicated it had $ 3.7 billion in liquidity at the end of September. That included $ 3 billion in cash on hand plus $ 700 million available through a credit facility. Total liquidity at the end of Q3 was down more than 9% from the end of Q2. Since the third quarter ended, RCL has added over $ 1 billion to its cash position, through a $ 500 million issue of senior notes and stock sales, putting an additional 8.33 million shares on the market at $ 60 each. In his note on Royal Caribbean, Montour wrote, “[We] most constructively on an OW-rated RCL, which we believe has the most compelling set of demand drivers … its vast investments in premium-priced new hardware, as well as consumer data, all set up RCL well to grow too big for the industry in revenue metrics. , margins, and ROIC over the longer term. ”Montour backs its Overweight (ie Buy) rating with a $ 91. price target. This figure represents a 30% upside potential for 2021. (To watch Montour’s history, click here) Do rest the Street agrees? As it happens, the analyst consensus is more of a mixed bag. 4 buy ratings and 6 Holdings give RCL a Buy rating. Meanwhile, the stock is selling for $ 69.58 per share, just above the $ 68.22 average price target. (See RCL stock analysis on TipRanks) Norwegian Cruise Line (NCLH) With a market cap of $ 7.45 billion and a fleet of 28 ships, Norwegian Cruise Line found its relatively smaller size as an advantage in this pandemic time. With a smaller and newer fleet, overhead costs, especially ship maintenance, were lower. These benefits do not mean that the company has avoided the storm. Earlier this month, Norway announced that it would extend its cruise prevention policy, covering all scheduled cruises from January 1, 2021 through February 28, 2021, plus selected cruises in March 2021. The cancellations come this as Norway’s revenue fell – in the third quarter. , the top line was just $ 6.5 million, compared to $ 1.9 billion in the year-ago quarter. The company also reported a cash burn of $ 150 million a month. To combat the loophole and minimal revenue, Norway, in November and December, took steps to improve liquidity. The company closed at $ 850 million in higher notes, at 5.875% and due in 2026, during November, and earlier this month closed an offering of common stock. The total stock offered was 40 million shares at $ 20.80 per share. Together, the two bids raised over $ 1.6 billion in new capital. On a more positive note, Norway is preparing for the eventual resumption of full services. The company announced, on Dec. 7, a partnership with AtmosAir Solutions for the installation of air purification systems on all 28 of its current fleet vessels, using filtering technology known to defeat the coronavirus. Montour JJM highlights these benefits in his review of Norway, and summarizes the bottom line: “This, combined with a relatively new, higher-end brand / ship footprint, would lead us to believe it is well placed to outperform price growth, though its demographic is probably skewed toward older age customers. continues to drag through 2021. Ultimately, NCLH is a high-quality asset in the broader cruise industry, with a higher beta to cruise recovery, and should see better performance as the industry returns and investors look further out of the risk spectrum. “Montour gives the stock a $ 30 price target and an Overweight (ie Buy) rating. Its target suggests a 27% upside on the one-year time frame. Norway is another cruise line with Moderate Purchase of analyst consensus This rating is based on 4 Buy, 4 Holdings, and 1 Sell placed in recent months.As for RCL above, the stock price here, $ 23.55, is currently higher than average price target, $ 23.22. (See NCLH stock analysis on TipRanks) Carnival Corporation (CCL) Last up, Carnival, is the world’s largest cruise line, with a market cap of $ 23.25 billion, more than 100 ships on across its brands, and over 700 destination ports.In normal times, this huge footprint gave the company an advantage; now, however, it has become an expensive liability. This is evident from Q3’s fiscal cash burn company, which approached $ 770 million. Like the other major cruise companies, Carnival has extended its cruise cancellation, or, in company terms, the ‘break in operations.’ The Cunard line, one of the Carnival brands, has canceled cruises on Queen Mary 2 and Queen Elizabeth through early June next year Carnival has also canceled operations in February from the ports of Miami, Galveston, and Port Canaveral, and has pushed the opening cruise of the new Mardi Gras ship back to the end of April 2021. These measures have been taken in accordance with coronavirus restrictions. Carnival shares. and revenues are suffering deep losses this year. The stock is down 60% so far, despite some recent price rallies since the end of Oct. Revenue fell to just $ 31 million in the fiscal third quarter, reported in September. Carnival reported a loss of nearly $ 3 billion in that quarter. the third quarter with over $ 8 billion in cash, an impressive resource to face the difficult situation.This combination of strength and weakness led Montour to give Neutral (ie Hold) a rating on CCL shares. Its $ 25 price target suggests a potential upside of 23%. In comments on Carnival, Montour wrote, “[We] believe that some of the same relative net product drags it saw in 2018-2019 due to its pure size will likely come top of mind on the other side of this crisis … However, given CCL’s relative share reduction , less pre-crisis price growth, and geographic diversification, we see it as the least disadvantaged over the next few months and we are not surprised at its recent performance. We believe this will reverse in the 2H21. ”Overall, Carnival has a Hold rating from the analyst consensus. This score is based on 10 reviews, decomposing into 1 Buy, 8 Holdings, and 1 Sell. The stock is selling for $ 20.28 and its average price target of $ 18.86 suggests a potential downside of ~ 7%. (See CCL stock analysis on TipRanks) To find good ideas for stocks trading at attractive valuations, visit TipRanks Best Stocks to Buy, a newly launched tool that unites all TipRanks.Disclaimer equity insights: The opinions expressed in this article are solely those of the analysts concerned. The content is intended for informational use only. It is very important to do your own analysis before making any investment.