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Buy Norwegian Cruise Line, Sell Carnival?

By Rick Munarriz – Oct 25, 2021 at 11:10AM

Key Points

  • Citi is initiating coverage of Norwegian Cruise Line with a buy rating and a $39 price target.
  • The analyst is also downgrading industry leader Carnival, slashing the cruise line's price target in the process.
  • The pricing climate favors Norwegian Cruise Line at this phase of the recovery process, but the long-term prospects remain promising for all three publicly traded players.

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It's passing ships in the cruise line industry as an analyst downgrades the market leader while initiating coverage of a rival with a bullish rating.

They say that a rising tide lifts all ships, but once again it seems as if the same can't be said about cruise line stocks. Citi analyst James Ainley is kicking off the new trading week by initiating coverage of Norwegian Cruise Line Holdings (NCLH -1.43%) with a bullish buy rating, just as he's downgrading shares of larger rival Carnival (CCL -2.30%) (CUK -2.04%)

There's a method to the madness. Ainley feels that Norwegian Cruise Line is better positioned to cash in on where the recovery stands for one of the hardest-hit niches of the travel industry. He feels that the recovery is favoring premium cruise lines given industry pricing trends heading into next summer. Carnival operates some high-end cruise lines, but its namesake brand is priced aggressively as the mass-market leader of the cruising industry. Carnival's flagship brand is often the haven for first-time cruisers and folks looking for the best deals in affordable cruising. Norwegian Cruise Line and Royal Caribbean (RCL 0.08%) tend to land slightly higher on the pricing spectrum. 

Two couples playing on the shoreline with a cruise ship in the water behind them.

Image source: Getty Images.

Passing ships

Ainley downgrading Carnival stock from buy to neutral -- while slashing his price target from $34 to $24.50 -- isn't a call to sell the stock. However, downgrading the shares on the same day he initiates coverage of Norwegian Cruise Line with a buy rating is clearly a mandate on where he feels investors should place their recovery bets. His fresh $39 price target on Norwegian Cruise Line represents a hefty 53% gain from where the shares started the week. The lower-price goal on Carnival is just 10% higher than where the stock was at the end of last week. 

It's not just the market favoring premium cruise brands at the moment, a call that would also seem to favor Royal Caribbean even if Ainley's Monday moves centered around the country's largest and third-largest cruise line operators. Pitting Norwegian to Carnival finds the former better positioned in terms of ship pipeline, earnings quality, and valuation at this point. Carnival has taken a more defensive approach, unloading some of the older ships on its fleet. Carnival also has fewer new ships on the way as a percentage of its current fleet. 

There's no denying that the cruising industry has had a challenging restart process. Plans to start sailing again this summer that seemed so ambitious earlier this year proved problematic as the peak travel season played out. However, after a brutal 2020 for the industry, one would think that the three cruise line stocks would be beneficiaries of pandemic-tackling vaccinations that became widely available in 2021. It hasn't worked out that way, and all but Royal Caribbean have been treading water in terms of year-to-date shareholder gains.

  • Royal Caribbean is up 13.3% this year.
  • Carnival stock climbed 2.9% in 2021. 
  • Norwegian Cruise Line has inched 0.2% higher.

Royal Caribbean was the top gainer last year, too. 

The climate is getting kinder. Regulatory hurdles have been largely cleared now. International travel restrictions are starting to ease as global vaccination rates improve and active COVID-19 case counts recede. It's not necessarily smooth sailing for the cruise line stocks. We've seen some false starts in the pandemic's recovery process. However, next summer will likely be far kinder to the industry than this deficit-saddled year. The water may still be rough, but the long-term prospects for all three cruise lines are promising.

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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