Cruise line stocks have come a long way since bottoming out in mid-March. Shares of Carnival (NYSE:CCL) (NYSE:CUK) and Norwegian Cruise Line Holdings (NASDAQ:NCLH) have more than doubled, and Royal Caribbean (NYSE:RCL) is leading the pack, more than tripling as of Wednesday's close.

Have the country's three largest cruise line stocks risen too high, too soon? One analyst seems to think so. Jamie Rollo at Morgan Stanley is downgrading shares of Norwegian Cruise Line this week. He's also reinstating coverage of Royal Caribbean and Carnival. All three stocks were tagged with a bearish underweight rating on Wednesday morning, but even that wasn't enough to send investors scurrying for the gangway. All three stocks moved higher on Wednesday.

Someone ziplining on the coast of Labadee with a Royal Caribbean ship in the background.

Image source: Royal Caribbean.

Bracing for rough waters

Rollo thinks it's time to sell into what was essentially an April rally for the three leading cruise lines. He feels the industry will be last form of travel to bounce back, a view that's pretty much acknowledged as fact these days. Hotels are starting to open up. Airlines are starting to add flights. Cruise lines don't have plans to start sailing until early August -- and even that plan may fall apart. 

The analyst sees negative earnings for the sector until 2023, and it's going to be a bumpy next three years. There are still cruise ships out there with crew members who need to be repatriated, and most of that workforce will probably never want to set sail again. Rollo expects it will take about six months for the industry to rehire crews and reposition ships. This would place us closer to the end of the year for sustainable cruise levels, but 2021 will be challenging. The analyst is bracing for depressed revenue yields as a result of sluggish demand, travel uncertainty, and folks using the sweetened credits they got on 2020 cancellations. 

Rollo's downgrade of Norwegian Cruise Line from equal weight to underweight makes sense from his perspective. The stock is now 156% above its mid-March bottom, and the fundamentals seem to be left behind. His price target of $13 implies a 28% decline from Wednesday's low. 

Reinstating coverage of Norwegian Cruise Line's larger peers is also naturally not going to be a bullish affair. All three have raised billions in liquidity since March, but will that be enough? This highly leveraged industry is facing stiff operating losses and significant capital expenditure commitments, and it will probably mean even more equity to raise in the near terms for all three players. His reinstated underweight ratings come with price targets of $33 for Royal Caribbean and $11 for Carnival, 43% and 36% below where the two stocks are now, respectively. 

Sailing away

It's easy to wonder if the party is over. It's easy to wonder if Rollo is right. But the news isn't all bad. Time is seen as an enemy for Carnival, Royal Caribbean, and Norwegian Cruise Line given their cash-burn rates as they ride out the storm, but the clock is also an ally. Time will help folks forget about the unease they once felt about boarding a cruise ship amid a health crisis.

Florida's governor announced on Wednesday that the state will enter the second phase of its aggressive reopening strategy, something that won't necessarily sway an early end to the "no sail order" that's keeping the cruise lines off the travel menu, but that will get folks in the home state of all three cruise lines to start considering vacations sooner rather than later. Florida's stepped-up reopening efforts could help keep the recession in check near the most popular embarkation ports, and anything that speeds up the recovery process for the three cruise lines makes it less likely that we're three years away from a return to profitability.