Despite its share prices, recent developments in cruise line stocks are not very encouraging. An analyst is lowering the shares of Norwegian Cruise Line Holdings (NASDAQ: NCLH) and Royal Caribbean (NYSE: RCL) Wednesday morning, and that follows the downgrade of S&P global ratings Carnival‘s (NYSE: CCL) (NYSE: CUK) credit rating – non-investment grade or junk status – Tuesday afternoon.
Now that the industry is driving future trips through at least mid-September, it’s easy to see why credit rating agencies are getting a little nervous here. The three cruise line operators have raised billions in new financing each in recent months, and are years away from nearing profitability levels last year. Stock downgrades are a different beast as Wall Street is reacting to three investments that have doubled in value from their spring lows despite fundamentals that continue to erode.
Reality as a port of call
Barclays analyst Felicia Hendrix is downgrading the Royal Caribbean and Norwegian Cruise Line rating from overweight to neutral. She doesn’t see much of an upside in the near term at current levels. Stocks are best trampled to current levels until the industry resumes normal operations. They could also potentially drop again due to current rigid valuations with earnings and incomes going the wrong way for the time being and unlikely to return to previous levels for some time. There could be more delays and disruptions on the road to resuming, and she believes there are more compelling opportunities in the hosting and gaming sectors with better risk-to-reward ratios.
It is lowering its target price on Royal Caribbean shares from $ 55 to $ 50, 8% below Tuesday’s close. It is sticking to its previous price target of $ 21 on Norwegian Cruise Line, which offers a 16% rise since Tuesday’s close.
Its price targets are actually higher than those given by Chris Woronka at Deutsche Bank, who on Tuesday morning raised his short-term price targets for the three publicly traded stocks. The shares were trading at a premium of 14% to 33% on those high targets, which is not good if you are a bull, but the shares responded by closing 4% to 6% more on the day.
Stocks are rising, despite a perfect storm. The COVID-19 pandemic shows no signs of disappearing, and that mid-September date for cruises to start sailing again is not written in permanent ink. Add in the growing possibilities that the global recession will only worsen as the year progresses, and we could begin to see more passengers on canceled cruises opt for cash rebates for sweetened credit on future departures.
Shares in Carnival, Royal Caribbean, and Norwegian Cruise Line may continue to rise, but with the fundamentals going the other way, the gains will only make investments much more speculative right now. The risks are so high, as stocks have become speculative right now. Sail responsibly, investors.