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Why Royal Caribbean, Carnival, and Norwegian Cruise Line Stocks Are Still Rocking

By Rich Smith – Aug 11, 2020 at 1:20PM

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Analysts cut price targets and cruise stocks go... up?

What happened

For the second day in a row, cruise line stocks are full speed ahead and racing for the open sea.

Yesterday, a better-than-expected revenue report out of Royal Caribbean (RCL 0.77%) sparked a rally across the cruise line sector. The momentum is carrying into this afternoon, with Royal Caribbean shares gaining another 4.3% through 12:15 p.m. EDT, Carnival Corporation (CCL 1.35%) lagging just a bit with a 3.6% gain, and Norwegian Cruise Line Holdings (NCLH 1.46%) up a solid 6%.

Cruise ship next to a beach with palm trees

Image source: Getty Images.

So what

And yet, at the same time that individual investors appear to be getting more optimistic about cruise stocks, the professionals are turning conservative. In today's news, two of Wall Street's biggest names cut their price targets on Royal Caribbean.

Saying Royal Caribbean has "ample" access to capital and is likely to at least begin a "gradual" return to service before the year is out, reports TheFly.com, investment bank Stifel Nicolaus is maintaining its buy rating on Royal Caribbean shares. Stifel furthermore notes (according to StreetInsider.com) that it's hoping to see a COVID-19 vaccine begin distribution in the first quarter 2021, which could accelerate a recovery. Nevertheless, the analyst has reduced its price target from $85 a share to just $72 a share.

Investment megabanker JPMorgan is also cutting its price target on the stock, from $72 to just $67. Contradicting Stifel's optimism, JP warns that the cruise industry's recovery could be slower than previously forecast -- making Royal Caribbean shares in particular worth less than the analyst previously thought.

Now what

Granted, JPMorgan likewise believes Royal Caribbean stock will outperform the market, and continues to recommend the shares for this reason. But there seems to be reason for caution here, as even these optimistic analysts' price target cuts imply.

Already, the past two weeks have seen two of the three major publicly traded cruise lines warn that they are burning through cash at rates higher than earlier anticipated. Norwegian Cruise Line Holdings is now burning $160 million a month, and Royal Caribbean anywhere from $250 million to $290 million. Given the trend, I wouldn't be surprised if Carnival, too, reports accelerated cash burn in its next update.

Even assuming "ample" liquidity, burning more cash in the middle of a recession is not a good thing. Not to put too fine a point on it, but it's a reason for these stocks to be trading down, not up.

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

Stocks Mentioned

Royal Caribbean Cruises Stock Quote
Royal Caribbean Cruises
RCL
$56.98 (0.77%) $0.43
Carnival Corp. Stock Quote
Carnival Corp.
CCL
$9.01 (1.35%) $0.12
Norwegian Cruise Line Stock Quote
Norwegian Cruise Line
NCLH
$15.69 (1.46%) $0.23

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

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