Cruise operators have been having fun with strong demand since climbing out of the Covid pandemic, which could have some investors wondering if the nice times will last. UBS believes they may. For one, the gap between cruise prices and land-based hotel prices remains to be “meaningfully wider” than it was in 2019, UBS analyst Robin Farley wrote in a note Monday. “While the cruise lines will at all times have a spot to hotel pricing, because there is no such thing as a business travel within the cruise sector to support pricing, there is no such thing as a fundamental reason why that gap must be significantly wider in 2024 than it was in 2019, especially because the expansion in US hotel rate has been driven by leisure demand,” she said. Through the primary quarter of this yr, the U.S. hotel rate was up over 20% compared with 2019, Farley noted. While cruise lines have seen strong year-over-year demand, per diems — which is how cruises measure the berth pricing per day, including onboard revenue — lag that of hotel rates. Royal Caribbean saw a 16% per diem increase in 2023 from 2019, Norwegian Cruise Line was up 6%, Carnival rose 6% and Viking ‘s per diems gained 17%, she said. Viking just went public on May 1. On top of that, cruises are benefiting from retiring baby boomers who want to spend more time traveling and millennials who’re beginning to hit cruising age, Farley said. The trend began before the pandemic, accelerating ticket prices, and still continues, she added. “Cruise demand can be tied to a broader consumer desire for accumulating experiences relatively than objects,” Farley wrote. “We consider that very same dynamic will proceed to profit cruise demand, as hotels have already seen leisure travel grow past pre-pandemic levels.” In truth, the industry is attracting recent passengers along with benefiting from repeat customers, she said. For example, Carnival’s new-to-cruise passengers jumped greater than 20% in the primary quarter, he identified. “We will see that 2024 will not be just benefiting from pent up demand, because that is totally recent demand,” Farley said. Melius Research can be bullish on the industry’s future and believes cruise lines are set for continued margin expansion over the following several years. “Demand for cruise has roared back since early ’23 and pricing has followed. There was concern across the sustainability of the pricing gains, but every quarter demand / pricing accelerates,” analyst Conor Cunningham wrote in a note May 28. “Cruise lines are actually just catching hotels on price growth vs. ’19 and have further upside as they appear to shut the gap to land-based vacations (historically 15% discount vs. 30% today).” Meanwhile, Morgan Stanley’s channel checks show bookings proceed to normalize partly as a consequence of low remaining inventory and “belt tightening” by consumers. Nonetheless, cruise pricing is holding up, analyst Jamie Rollo said in a note Friday. The firm met with management of Carnival, Royal Caribbean and Norwegian recently and the feedback was “positive across the board,” he said. Who will profit Royal Caribbean is the highest pick of UBS’ Farley, who has a buy rating on the stock. Her $168 price goal on the stock suggests about 9% upside from Friday’s close. “RCL’s Wave season has been the strongest on company record from a volume and price perspective,” she wrote. “RCL is in a record booked position with 2024 rates further ahead of 2023 than they were at the beginning of the yr.” In April, the cruise operator posted an earnings beat for its first quarter and raised its full-year earnings-per-share guidance. “The buyer is doing exceptionally well. Demand may be very strong, and it’s accelerating,” CEO Jason Liberty told CNBC in April after the earnings report. The corporate’s management told Morgan Stanley during their recent meeting that the strong demand is driven by structural growth in travel, in addition to spending from its higher-income passengers and the cruise’s value gap to land, which is at about 25% to 30% compared with the 15% gap pre-Covid. “Demographics are encouraging, with half of the corporate’s guests now millennials, its new-to-cruise share ahead of pre-Covid levels, and repeat rebooking rates twice what they were previously,” Rollo wrote. “The expansion of its private island destination capability and technology improvements look set so as to add incremental advantages over multiple years, which the corporate sees as structural benefits.” Rollo has an equal-weight rating on the stock, even though it is his relative preference within the industry. Meanwhile, Farley also has a buy rating on Carnival. Her $21 price goal implies about 26% upside from Friday’s close. She believes the stock will profit from Celebration Cay, a personal island that is about to open in summer 2025. The cruise line’s management told Morgan Stanley it sees ongoing demand from the 20% to 45% value gap versus land-based vacations. Its private islands currently receive as many guests as all of its competitors combined and it expects one other 4 million when Celebration Cay becomes fully operational, said Rollo, who’s underweight Carnival. “CCL’s brands are seeing customers travel less incessantly, but spending more after they do (for instance, taking one cruise and travelling in a set, relatively than two trips in balcony cabins),” he wrote. One other name on Farley’s buy list is Viking. She believes it should profit from travel demand from the higher-end consumer. Her price goal of $35 suggests 11% upside from Friday’s close. Lastly, Farley is neutral on Norwegian. She expects the cruise line should profit from a powerful demand environment but said it still has balance sheet and execution challenges. Earlier this month, the cruise operator lifted its full-year earnings forecast, citing strong demand and an improved outlook for the yr. Within the meeting with Morgan Stanley, executives expressed confidence that Norwegian can achieve $300 million in savings.
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