If you believe one Wall Street pro, Royal Caribbean (RCL 12.18%) is the most attractive stock in the battered cruise ship sector. An analyst at Wedbush this week called it a worthy buy compared to peers like Carnival (CCL 11.40%) and Norwegian Cruise Lines (NCLH 13.33%). Shares could land at $63 per share within the next year, the analyst predicted, from around $42 per share today.
Royal Caribbean did prove the strongest cruise ship business in the quarters preceding the COVID-19 pandemic. Net revenue yields jumped 8% in 2019 compared to a roughly flat result for Carnival. And those gains came despite a few significant challenges, including the worst hurricane season Royal Caribbean had endured.
Through those issues, its focus on customer satisfaction and on creating novel experiences like its exclusive island resorts allowed it to attract better pricing and occupancy trends than either Carnival or Norwegian Cruise Lines last year.
Under normal circumstances that performance gap would make Royal Caribbean a clear favorite for investors going forward. But times have changed. Months of forgone revenue from canceled cruises have forced the company to load up on debt, and it is still losing about $250 million each month, with global cancellations likely to last at least through July.
That's when the real challenges begin, with some of the major risks to the business including social distancing requirements, sluggish economic growth, and far too much industry capacity.
Investors who believe the cruise industry will sail through those issues might consider buying Royal Caribbean stock. But they should still temper their expectations for a quick rebound or a surging stock price in the short term. Operating trends are likely to get worse before slowly rebounding over a period of years.