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Did Carnival, Royal Caribbean, and Norwegian Cruise Line Climb Too High, Too Soon?

By Rick Munarriz – Jun 23, 2020 at 10:30AM

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A Wall Street pro is raising his price targets on the three cruise line stocks, but it's not necessarily a positive sign.

There's some good news and bad news in the latest analyst update for cruise line stocks. The good news is that Chris Woronka at Deutsche Bank is boosting his price target for all three of the publicly traded players. The bad news is that his elevated price goals for shares of Norwegian Cruise Line Holdings (NCLH -18.04%), Carnival (CCL -23.25%) (CUK -23.01%), and Royal Caribbean (RCL -13.15%) are all well below what the market thinks the three companies are currently worth.

Not every price target increase is bullish. Not every price target decrease is bearish. A lot of times Wall Street pros are just scrambling to keep up with stocks after big moves higher or lower, and this is an industry in which all three cruise line operators have moved sharply higher since bottoming out between mid-March and early April. With a lot of stiff headwinds blowing in from the bow, Woronka is wondering the stocks have moved too high, too soon -- and he's not alone.

A man holding a suitcase open as money flies out.

Image source: Getty Images.

Packing some Dramamine

All three stocks have more than doubled since the post-COVID-19 lows in which Carnival, Royal Caribbean, and Norwegian Cruise Line had to cease their scheduled sailings. The developments have only grown more negative instead of positive in that time. When the stocks bottomed out, it was under the expectation that passengers would be boarding cruise ships as soon as mid-April. We're now looking at October as the earliest possible resumption of travel. 

All three operators have raised billions in new financing since the interruption, but the moves have come at either high interest rates or at dilutive stock and convertible prices that are now well below where we are now. The fundamentals of the industry and the stock charts appear to be passing ships, and that leaves some of the market's more cautious observers trying to keep up with surge in stock prices but without conceding that the rally in its entirety is warranted. Woronka's new price targets for each of the three stocks is more than a little interesting. 

Stock Old Target New Target Current Price Premium
Carnival $11 $13 $17.23 33%
Royal Caribbean $36 $40 $51.86 30%
Norwegian Cruise Line Holdings $11 $15 $17.09 14%

Data source: Deutsche Bank.

Woronka's Tuesday morning update does raise the bar for all three, but the stocks are already trading between 14% and 33% higher than that as of Monday's close -- and that was with all three stocks moving sharply lower on the first trading day of the week. Any boost in price targets is inherently not a bearish development, but you certainly can't call this bullish.

Woronka feels that too many of his peers are forecasting a V-shaped recovery in industry earnings if we look out a couple of years, a dicey proposition given the real challenges facing Carnival, Royal Caribbean, and Norwegian Cruise Line. All three players have done what they can to position themselves for a recovery, but it's too soon to assume that it will ever be business as usual for the hardest-hit travel niche in this pandemic. Even the outlook for the travel industries that are back in business -- hoteliers, airlines, and car rental agencies -- is murky at best.

An increased price target isn't always a good thing. With the stocks starting to slide since June 8, we may eventually get to the point when bulls lowering the price targets isn't necessarily a bad thing. For now, this will continue to be a volatile industry for investors.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Royal Caribbean Cruises Ltd. Stock Quote
Royal Caribbean Cruises Ltd.
RCL
$37.90 (-13.15%) $-5.74
Carnival Corporation Stock Quote
Carnival Corporation
CCL
$7.03 (-23.25%) $-2.13
Carnival Corporation Stock Quote
Carnival Corporation
CUK
$6.19 (-23.01%) $-1.85
Norwegian Cruise Line Holdings Ltd. Stock Quote
Norwegian Cruise Line Holdings Ltd.
NCLH
$11.36 (-18.04%) $-2.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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