Cruise operators have been enjoying robust demand since emerging from the COVID-19 pandemic, and some investors may be wondering if the good times will last. UBS is confident they will. First, the gap between cruise fares and land hotel rates is “significantly larger” than in 2019, UBS analyst Robin Farley wrote in a Monday note. “While there will always be a gap between cruise line and hotel rates because the cruise industry doesn’t have business travel to support its rates, there is no fundamental reason for that gap to be significantly wider in 2024 than in 2019, especially since U.S. hotel rate growth is driven by leisure demand,” he said. Farley noted that U.S. hotel rates through the first quarter of this year were up more than 20% compared to 2019. Cruise line demand is strong year-over-year, but daily rates (how cruise measures the price of a bed per day, including onboard revenue) are below hotel rates.Royal Caribbean’s 2023 per diem will be up 16% over 2019, Norwegian Cruise Line’s will be up 6%, Carnival’s will be up 6% and Viking’s will be up 17%, she said. Viking just went public on May 1. On top of that, the cruise industry is benefiting from retiring baby boomers who want to spend more time traveling and millennials who are starting to reach cruise age, Farley said. This trend started before the pandemic, accelerating ticket prices and is continuing, she added. “Cruise demand is also tied to a broad consumer desire to have experiences over things,” Farley wrote. “Hotels have already seen leisure travel grow beyond pre-pandemic levels, and we believe the same dynamics will continue to benefit cruise demand.” In fact, the industry is attracting new passengers in addition to benefiting from repeat customers, she said. For example, he noted that first-time cruisers on Carnival increased by more than 20% in the first quarter. “We see 2024 not just benefiting from pent-up demand because it’s entirely new demand,” Farley said. Melius Research is also bullish on the industry’s future, believing cruise lines will continue to see margin expansion for the next few years. “Demand for cruises has rebounded sharply since early ’23, and prices have followed suit. There were concerns about the sustainability of price increases, but demand and prices have accelerated quarter after quarter,” analyst Conor Cunningham wrote in a May 28 note. “Cruise lines are now catching up with hotels in price increases compared to 2019, and have room to go further up as they seek to close the gap with land-based vacations (historically at 15% off, now 30% off).” Meanwhile, Morgan Stanley’s channel research shows bookings continue to normalize, thanks in part to low inventory remaining and consumers “saving up.” Cruise prices are holding up, however, analyst Jamie Rollo said in a Friday note.The company has met recently with management from Carnival, Royal Caribbean and Norwegian, and the response has been “generally positive,” he said. Royal Caribbean is UBS’s Farley’s favorite stock to benefit, and he has a buy recommendation on the stock. His $168 price target suggests about 9% upside from Friday’s closing price. “RCL’s wave season is the strongest on the company’s record from a volume and price perspective,” he wrote. “RCL is in record bookings, with 2024 rates now further out than they were in 2023 at the start of the year.” In April, the cruise line reported first-quarter profits that beat expectations and raised its full-year earnings per share outlook. “Consumers are extremely buoyant. Demand is very strong and accelerating,” CEO Jason Liberty told CNBC after the company’s April earnings release. The company’s management told Morgan Stanley at a recent conference that the strength of demand is due to structural growth in travel, higher-income passenger spending, and a widening of the cruise-to-land gap from 15% pre-COVID to 25%-30%. “Demographics are positive: half of the company’s passengers are millennials, the percentage of first-time cruisers is exceeding pre-COVID levels, and repeat guest rebookings are double the historical rate,” Rollo wrote. “Expanding private island destination capacity and improving technology should provide incremental benefits over the next few years, which the company sees as a structural advantage.” Rollo rates the stock an equal-weight, but is a relative favorite within the industry. Meanwhile, Farley also has a buy recommendation on Carnival. Her $21 price target implies an upside of about 26% from Friday’s closing price. She thinks the company’s shares will benefit from Celebration Cay, a private island scheduled to open in the summer of 2025.Cruise line management told Morgan Stanley that it expects continued demand due to a 20% to 45% value gap with land-based vacations. The company’s private islands are currently hosting as many guests as its competitors combined, and an additional 4 million guests are expected when Celebration Cay is fully operational, said Rollo, who is underweight Carnival. “CCL’s brands are driving a shift where customers are traveling less frequently but spending more when they do (e.g., traveling in a suite on one cruise versus two trips in a balcony stateroom),” he wrote. Another stock on Farley’s buy list is Viking. He thinks the company will benefit from travel demand from high-end consumers. His $35 price target suggests an 11% upside from Friday’s closing price. Finally, Farley is neutral on Norwegian. He expects the cruise line to benefit from a strong demand environment, but said it still has balance sheet and execution challenges. Earlier this month, the cruise line raised its full-year profit forecast, citing strong demand and an improving outlook for the year. In a meeting with Morgan Stanley, executives expressed confidence that Norwegian could achieve the $300 million in savings.
Cruises tend to be cheaper than hotel vacations, which is good news for these stocks
