Carnival (NYSE:CCL) Corp. experienced a significant rise in its stock value on Tuesday, following an upgrade by Truist analyst Patrick Scholes. The analyst shifted his rating from 'sell' to 'hold', citing robust future booking trends and improved valuations due to a recent decrease in price. Scholes also slightly raised his stock price target for Carnival from $16 to $17.
The analyst has maintained a bearish stance on Carnival for several years, but he noted that the European market shows the most potential for growth in 2024, a trend that favors Carnival due to its substantial presence in that region. However, Scholes refrained from adopting a bullish stance because of potential competition from privately owned MSC Cruises.
In addition to Carnival, Scholes also upgraded his rating for Royal Caribbean (NYSE:RCL) Group from 'hold' to 'buy'. This change mirrored an overall shift in his view of the cruise sector, which he upgraded from neutral to positive.
On Tuesday, Carnival's shares rose by 1.6% in premarket trading, while Royal Caribbean's stock saw a 1.8% increase. This comes after a period of cooling off since the end of June when Carnival's shares dropped by 20.1%, Royal Caribbean's by 7.5%, and Norwegian Cruise's by 21.4%. In contrast, the S&P 500 index recorded a marginal increase of 0.1% during this time.
Scholes explained that two months ago, despite strong booking trends, he felt the cruise stocks were overvalued after several months of significant outperformance. From March to June end, Carnival's stock saw an impressive rise of 85.5%, while shares of Royal Caribbean and Norwegian Cruise Line (NYSE:NCLH) Holdings Ltd. increased by 58.9% and 61.9%, respectively.
Despite this recent downturn, Scholes now recommends the cruise sector once again. He has maintained his neutral rating on Norwegian Cruise since July. The company's shares rose by 0.8% before Tuesday's market opening.
In terms of industry fundamentals, Scholes noted that sales for 2024 are approximately 55% to 60% higher than the same period in 2019, pre-COVID. Sales for 2025 have doubled compared to 2019 levels. Although new supply for these years is estimated to be 20% to 25% higher than in 2019, demand continues to surpass supply. Consequently, Scholes argues that Wall Street's current consensus earnings predictions for 2024 and 2025 are overly cautious, especially concerning Royal Caribbean.
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