Cruise Stocks Get Upgraded by Macquarie, Because Covid’s Worst Is in the Past

Macquarie Research has upgraded the cruise stocks to Outperform, asserting that “most negative catalysts are in the rear-view mirror.”

Based on valuation, Paul Golding and Charles Yu of Macquarie wrote that they see the most upside in Norwegian Cruise Line Holdings (ticker: NCLH), followed by Carnival (CCL), and Royal Caribbean Group (RCL). They upgraded the stocks from Neutral.

Shares for Norwegian were at $31 and change Tuesday morning, up 4.6% in early trading, while Royal Caribbean and Carnival were also each up more than 4%.

The cruise operators have for the most part been unable to have any sailings for about a year due to the pandemic. A key question is when sailings in and out of U.S. reports will resume. The Centers for Disease Control and Prevention issued a conditional sail order last October, but U.S. sailings haven’t resumed. The cruise companies have suspended their U.S. sailings well into the spring.

Golding and Yu wrote that “technical instructions from the CDC are also forthcoming and could drive more confidence.”

In an email to Barron’s early last month, a CDC representative wrote: “Future orders and technical instructions will address additional activities to help cruise lines prepare for and return to passenger operations in a manner that mitigates COVID-19 risk among passengers, crew members, including simulated voyages, certification for conditional sailing, and restricted voyages.”

Although still well below their pre-pandemic levels in early 2020, the cruise stocks have been moving up as investors get more confident about a reopening of the economy. As of Monday’s close, the stocks of all three companies were up by at least 15% year to date.

Besides forthcoming guidance from the CDC, macro catalysts for the cruise companies include “an expectation of sufficient vaccine efficacy for consumers to feel comfortable engaging in leisure activities.”

“While shares have bounced quite a way off their 1-[year] lows, and barring recession or a sector rerating, the catalysts should trend more positive from here into summer,” they wrote.

The research note points out that Carnival’s announcement last month that it had closed on a $3.5 billion senior unsecured debt offering “bodes well” for its liquidity situation and for the industry’s. “It demonstrates the potential for the group to continue to fund operations even if the suspension gets drawn out,” they noted.

Separately, Carnival announced last month that it had priced an offering for its 40.5 million shares of common stock at $25.10. That adds up to about $1 billion of additional capital, one of various steps the company has taken to shore up its liquidity as its ships sit idle and it burns through hundreds of millions of dollars every month.