2 Top Cruise Line Stocks to Buy and 1 to Avoid During the Coronavirus Crisis

Norwegian Cruise Line (NCLH) 

Comprised of three brands that include Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises, this name operates 28 ships in the Caribbean, Europe, Alaska, Asia, Bermuda and Hawaii. Despite the fact that COVID-19 fears have pushed shares down by 76% year-to-date, Credit Suisse recommends that investors go in on NCLH based on its solid event path and positioning in an expanding segment. 

Chaiken points out that NCLH has recently enhanced liquidity in not one, not two, but six different ways. These include receiving a “debt holiday” from its export credit partners, delaying amortization payments which added $905 million of liquidity, an investment from private equity firm L Catterton, as well as share, convertible debt and notes offerings. On top of this, the company already ended 2019 with $1.8 billion of liquidity.  

With respect to cash burn, Chaiken estimates “NCLH has a cash burn profile in the $140-150 million per month range”, which gives it two years of runway in an environment with no revenue. It should also be noted that NCLH doesn’t have ship deliveries until 2022, alleviating some of the pressure on the company. “With $4 billion of liquidity, no new ship deliveries until 2022, and our assumption of a return to cruising in August, we do not see bankruptcy on the table,” the analyst commented. 

Sure, COVID-19 will most likely weigh on pricing and capacity in 2020, but Chaiken thinks that like RCL, the strong trends witnessed before the outbreak should be considered. “NCLH finished the year at 107% occupancy and reported net yields of 3.6% in 2019. Adjusting for headwinds related to Norwegian Pearl, Hurricane Dorian and Cuba, we think NCLH generated core growth of 5.6% in 2019… we think NCLH was likely ~20 -25% booked for 1H21, as of March 1, providing a layer of pricing stability, even as newly booked sailings potentially see significant pricing deceleration as some cancellations inevitably occur,” he explained. 

Adding to the good news, NCLH also stands to benefit from the reversal of the shortened Cuba booking window and improving mix for the former Cuba ships as well as lapping Hurricane Dorian and a technical issue related to Pearl, with these adding a “small layer of stability in a volatile time.” 

“We think NCLH offers a differentiated vacation, within an oligopoly, at a significant discount to other land-based alternatives and as such we believe we will see demand for the product come back,” Chaiken concluded. 

It should come as no surprise, then, that Chaiken joined the bulls. To start off his coverage, he put an Outperform rating and $21 price target on the stock. Should this target be met, a twelve-month gain of 50% could be in store. 

Turning now to the rest of the Street, 7 Buys and 8 Holds have been assigned in the last three months, making the consensus rating a Moderate Buy. In addition, the $16.50 average price target implies shares could surge 18% in the next year. (See Norwegian Cruise Line stock analysis on TipRanks)  

Carnival Corporation (CCL) 

When it comes to Carnival, the largest publicly traded cruise line, the company has found itself in choppy waters, with Chaiken not expecting smooth sailing anytime soon. 

Down 71% since the start of 2020, some might see this decline as representing a buying opportunity. However, in the long-term, Chaiken believes the company will come up short when compared to its peers. The analyst makes it clear that he doesn’t see bankruptcy as being very likely based on the fact that CCL raised $9 billion of liquidity over the last few months. Having said that, this financing could create a problem for CCL as it will almost triple its interest expense. 

Looking at the near-term, Chaiken points to its high levels of cash burn as setting the company up for trouble. “From a cash burn perspective, we estimate CCL has a cash burn profile in the ~$1 billion per month range, leaving them with just over nine months of runway in a zero-revenue environment. This compares to RCL of $450-470 million per month and NCLH of $140- 150 million per month,” he stated.  

Also problematic, CCL had less momentum going into the year than both RCL and NCLH as its net yields were flat. The most significant issue for CCL, though, is that passengers from Europe make up a substantial portion of its customer base, and Chaiken has less confidence in certain European economies, namely Italy. 

Expounding on this, Chaiken said, “Given CCL sources its European itineraries (~30% of capacity) with guests from Europe, in our view it adds an additional layer of risk to the story not present in RCL or NCLH…So while we think CCL will live to fight another day, we think CCL will underperform peers as demand rebounds. In short, we think CCL has greater implicit leverage to continental Europe given they fill their European-based itineraries with customers who live in Europe.” 

Bearing this in mind, Chaiken took a spot on the sidelines. Along with his Neutral rating, he set a $12 price target. This target suggests shares could shed 18% of their value in the next year. 

The verdict is in, and the rest of the Street agrees with Chaiken. 3 Buys, 8 Holds and 3 Sells add up to a Hold consensus rating. That said, the $19.33 average price target does indicate upside potential, 32% to be exact. (See Carnival price targets and analyst ratings on TipRanks)