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The Ratings Game: Cruise stocks don’t look at all like they’ve bottomed yet, analyst says

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There’s still no compelling reason to believe the shares of cruise operators have bottomed, as a “trifecta of worries” still remain, said Deutsche Bank analyst Chris Woronka.

Woronka reiterated the hold rating he’s had on Carnival Corp.
CCL,
-0.05%

for at least the last three years, and the hold ratings he’s had on Royal Caribbean Group
RCL,
-1.07%

and Norwegian Cruise Line Holdings Ltd.
NCLH,
+1.31%

since the pandemic selloff kicked into high gear in February 2020.

“While we sense that cruise perma-bulls see cruise stocks as meaningfully oversold here, we think it’s optically very different for most everyone else to have conviction that an actionable bottom is in,” Woronka wrote in a note to clients.

Woronka slashed his stock price targets for Carnival to $14 from $24, for Royal Caribbean to $50 from $76 and for Norwegian to $17 from $23.

“‘Our message is clear: We think it’s still too early to go bottom fishing on cruise stocks.’”

— Chris Woronka, analyst at Deutsche Bank

He said he has always believed cruise stocks are more “rented” as trading vehicles by hedge funds, while “long-only” investor interest in the sector appeared to be “fleeting” over any extended period.

“Recent conversations with a wide swath of investors yields our view that there isn’t likely to be much sustainable buying pressure in the near term (short covering and market-related trading bounces notwithstanding), particularly given relative stock performance against other key subsectors and a host of known (as well as some unknown) risks over the next 6-to-12 months,” Woronka wrote.

Carnival’s stock was little changed in midday trading, erasing an earlier gain of as much as 2.0%, while Royal Caribbean shares reversed an earlier intraday gain of 1.9% to slump 0.9%. Norwegian’s stock was up 1.4% midday, but was up 3.2% earlier.

All three stocks closed last Thursday at the lowest prices since early 2020. Carnival and Royal Caribbean shares have both lost roughly 52% year to date and Norwegian’s has dropped about 44%, while the SPDR Consumer Discretionary Select Sector exchange-traded fund
XLY,
+3.09%

has declined about 32% and the S&P 500 index
SPX,
+2.29%

has shed 21%.

Woronka said there are currently a “trifecta of worries” on cruise stocks:

Upcoming debt maturities in a rising interest rate environment.

The potential for economic weakness, which was initially limited to Europe but now includes the U.S.

Stubbornly rising oil prices that threaten to undermine margin potential.

Woronka noted that the three cruise operators have a combined $8.5 billion of debt due next year and $11.6 billion due in 2024. Although he doesn’t expect the companies to issue equity at current prices to help pay down that debt, he doesn’t expect investor concerns to go away unless interest rates stabilize and the outlook for 2023 earnings becomes clearer.

He expects Wall Street analysts to reduce their earnings estimates for the cruise companies and assumes how investors value the companies’ results have been “semi-permanently” reduced by the operational and capital realities resulting from COVID.

“Our message is clear: We think it’s still too early to go bottom fishing on cruise stocks,” Woronka wrote.

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