Friday, May 22, 2020
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It’s all about value.
When COVID-19 first became part of the national conversation in the U.S., no industry was tied more closely to the pandemic than the cruise business.
As the CDC outlined in a late March briefing, more than 800 cases and 10 deaths had to at that point been associated with cruiseliners. Reporting from the Washington Post and the Miami Herald shows as many as 65 people may have died after being exposed to the coronavirus onboard cruise ships.
In late March, the CDC recommended deferring all cruise travel during the pandemic.
Earlier this month, however, cruise operators indicated that by the end of the summer they expect to have ships embarking on cruises and executives from multiple cruise companies have indicated positive booking trends.
And analysts at Credit Suisse led by Benjamin Chaiken think now is the time to Buy.
In a note to clients published Thursday, Chaiken initiated coverage of the three major cruise operators — Royal Caribbean (RCL), Norwegian Cruise Lines (NCLH), and Carnival Cruises (CCL) — putting an Outperform rating on Royal and Norwegian and a Neutral rating on Carnival. Credit Suisse put a $67 price target on Royal shares, a $21 price target on Norwegian stock, and a $12 target on shares of Carnival.
Shares of Royal and Norwegian rose more than 8% on Thursday following the news; Carnival shares rose over 3%. All three stocks are still down more than 65% this year.
In Chaiken’s view, the case for these stocks comes down to two big factors — financial health and consumer demand.
“[Cruise stocks] are at all-time lows, and all three operators are now in cash preservation mode, having entered into liquidity enhancing credit agreements,” Chaiken writes. “With the risk of a liquidity crunch partially priced in, we think current levels offer an attractive entry point. We believe CCL has 9 months of liquidity (good through the end of November), NCLH ~27 months, and RCL ~12+ months.”
In other words, none of these companies are at imminent risk of running out of cash after the initial phase of this pandemic appeared to pose an existential threat to the business. Surviving the next few months, however, does not make for a great thesis on its own.
For that, Chaiken digs into what cruises actually offer consumers: affordable vacations.
“While COVID-19 will likely have a lasting impact on the cruise industry, which will potentially take years to regain pricing parity, we think the unmatched value proposition of the product will be a driving force behind a recovery,” Chaiken writes.
“A cruise includes accommodations, activities, meals, and often drinks, at a 50-70% discount to many other types of vacations. We are unable to think of a vacation alternative that involves international travel, multiple locations, entertainment (from live shows to shore excursions), and resort-like amenities at this price point. We believe this is a primary reason cruise demand has rebounded after past slowdowns, with demand returning in ~8-10 months per our estimates.”
Credit Suisse’s rough math suggests a Caribbean cruise from New Yotk offers a tropical vacation at about 1/3 the cost of flying to the Bahamas. And, yes, of course these trips aren’t exactly equivalent and a few-hours-long pit stop on an island doesn’t replace the experience of walking a few steps to the beach.
But a $700 vacation is accessible to a far larger number of consumers than a $2,000-plus vacation. And when consumer concerns about safety are addressed and pandemic fears subside, that value isn’t going to go away, in Credit Suisse’s view.
And given what economists have suggested about the shape this recession could take, value should be highly desirable in the years ahead.
What to watch today
4 a.m. ET: Alibaba (BABA) is expected to report adjusted EPS of 6.03 yuan on 107.04 billion yuan in revenue.
6:45 a.m. ET: Deere (DE) is expected to report adjusted earnings of $1.67 per share on $7.71 billion in revenue
6:45 a.m. ET: Foot Locker (FL) is expected to report an adjusted loss of 18 cents per share on $1.32 billion in revenue
Markets fall on Hong Kong tensions and slow COVID-19 recovery fears [Yahoo Finance UK]
China abandons hard growth target [Bloomberg]
Fed officials warn of long road ahead for U.S. economic recovery [Yahoo Finance]
IBM is latest tech giant to cut jobs in midst of pandemic [Bloomberg]
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Student loan borrowers face ‘increased stress, anxiety, and depression’ amid coronavirus shock, survey finds
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Editor’s note: Morning Brief will be observing Memorial Day. We will return Tuesday, May 26.
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