Goldman Sachs initiated coverage of cruise line stocks in a note Wednesday, signaling its confidence in the industry's growth potential. The investment bank assigned a Buy rating to Royal Caribbean (NYSE:RCL) with a price target of $162 and to Carnival Corp. (NYSE:CCL) with a target of $20, while Norwegian Cruise Line (NYSE:NCLH) received a Neutral rating with a $19 price target.
The bullish stance comes after a year marked by a robust performance from the cruise sector, highlighted by a recovery in occupancy and pricing that surpassed expectations. Contrary to investor concerns that cruise pricing may have reached its peak, Goldman Sachs anticipates further growth, attributing it to sustainable changes in industry practices and additional pricing tailwinds rather than just a surge in consumer demand.
Goldman Sachs outlines four key multi-year pricing tailwinds that are expected to drive the industry forward. These include a demand for travel that is likely to exceed the growth in supply, the positive effects of new ship launches on pricing power, improvements in revenue management leading to less discounting, and the potential for increased revenue from land investments. Additionally, the firm foresees opportunities for balance sheet improvements among the cruise lines, which could attract a wider range of investors and lead to a revaluation of the stocks.
Royal Caribbean is praised for its execution and is positioned to benefit significantly from the pricing tailwinds. The company's strategy includes the introduction of new "megaships" that promise higher earnings before interest, taxes, depreciation, and amortization (EBITDA) and a better return on investment. The expected expansion of CocoCay is also projected to contribute to net yield growth, with the company likely to reach investment-grade metrics by the end of the year.
Carnival is recognized for its conservative growth outlook and potential for a larger recovery in occupancy, particularly due to its higher exposure to European markets. The company's upcoming private island investments are anticipated to be a strong catalyst, with significant capacity increases and an expected EBITDA uplift from Celebration Key. Goldman Sachs also forecasts substantial balance sheet improvement for Carnival, predicting a reduction in leverage by FY2026.
Norwegian Cruise Line's recent progress is acknowledged, but Goldman Sachs remains cautious. The firm suggests that Norwegian's guidance for 2024 may lack conservatism and that cost efficiencies need to be proven. The upcoming Investor Day in May might offer further insights into the company's future, but for now, its valuation maintains a Neutral position.