Cruise stocks have had a rough start to 2020 as the coronavirus outbreak has spread in China and beyond.
Carnival Corp (NYSE: CCL) is down -16% year-to-date, Norwegian Cruise Line (NYSE: NCLH) is down just under -17% year-to-date, and Royal Caribbean Cruises (NYSE: RCL) is down nearly -18% so far this year.
But while headlines have been putting pressure on cruise stocks, industry trends have been on the upswing for much of the last decade and growing at a compounded annual growth rate of 5.2% between 2009 and 2017, according to a study from Deloitte. In that time frame, cruise passengers from the U.S. grew from 10.4 million in 2009 to 12.4 million by 2017, driving industry revenue growth from $12 billion to $18 billion.
As a result of this industry-wide growth and prior to the coronavirus outbreak, cruise stocks were on a tear last year with Royal Caribbean shares gaining 38.5%, and Norwegian jumping 39.5%.
While COVID-19 has temporarily upended these trends, Stifel analyst Steven Wieczynski says the downward pressure won’t last long.
“We believe until investors get a better sense of the ultimate impact of this ‘noise’ will have on the business, they will continue to tread water around these names,” Wieczynski wrote in a recent note. “If media attention continues to be outsized, could that have an impact on close-in bookings/pricing? Probably so, but we don’t believe this type of ‘noise’ will impact bookings volume for an extended period of time.”
“Ultimately, we don’t believe the recent events will have any long-term material impact on the group in general, given what we have seen from the cruise industry in the past,” the analyst added. “We continue to believe the virus/travel-related impacts have been more than priced into shares at this point, setting up an attractive entry point.”
And there’s one stock in the group that MKM Partners chief technician JC O’Hara and Strategic Wealth Partners CEO Mark Tepper say looks particularly attractive now.
“In my opinion, the coronavirus has really created a buyable pullback,” Tepper said. “Of all these names, my favorite would be Norwegian.”
“Booking windows and volumes are going up, discretionary on-board spending is strong, they’ve got a newer fleet, they’ve got the ability to enter new markets and, of the three, it’s the only one that doesn’t pay a dividend, so, if they did begin to pay one, that’d be a positive catalyst” for Norwegian stock, Tepper added.
O’Hara noted that from a technical perspective, the negative news around cruise stocks has lead to “a buyable dip” in Norwegian shares.
“If you look at Norwegian versus its peers, it’s in the best technical shape,” O’Hara said. “Currently, it’s only down 10% from its recent highs versus its peers, which are down closer to 15%. So, we’ve lost less and we’re actually starting to climb faster. So, I think if we are ready to dip our toe into the water, Norwegian is the cruise liner to buy here.”
Analysts rate Norwegian shares a Buy, and their consensus price target indicates 16.5% upside over the next twelve months.
Still, O’Hara also cautioned that past headline-driven downward pressure in cruise stocks, “it required patience for the stock[s] to slowly start climbing back. That makes sense, especially around the coronavirus. Who knows how long this is going to last? Who knows if we’ve seen the worst of it?”