Fed Rate Cut Sets Sail for US Cruise Stocks' Upward Voyage
Cruise stocks have shown a robust increase since the recent Fed rate cut, with $Norwegian Cruise (NCLH.US)$ leading the surge at a 18% rise, followed by $Carnival (CCL.US)$ and $Lindblad Expeditions (LIND.US)$ with gains of 16% and 14%, respectively.
The market sentiment towards cruise stocks is driven by several factors, including the optimistic yearly outlook from cruise operators and economic indicators that might encourage further rate cuts by the Federal Reserve.
Carnival recently upgraded its full-year outlook during its second-quarter earnings call, citing record demand that has enabled higher ticket pricing, a trend bolstered by the comparative value of cruise vacations against land-based options. This demand is not only sustained but also expected to grow, with Carnival's bookings for 2025 already surpassing those of 2024 in terms of occupancy and pricing.
"We are very pleased with the continued acceleration of demand for 2025 and beyond," Chief Executive Officer Josh Weinstein said in the statement.
Norwegian Cruise Line has also revised its 2024 targets upward for the third consecutive time, anticipating a 120% growth in adjusted EPS compared to 2023, primarily fueled by robust market demand. Royal Caribbean echoed this sentiment, reporting substantial increases in consumer spending onboard and for pre-cruise purchases.
Amid strong demand for cruises, recent interest rate cuts are likely to provide cruise operators with greater flexibility to enhance their profit margins in a market where demand remains high. This is particularly significant considering the substantial debt that many cruise operators accumulated during the pandemic, which has put a strain on their operational efficiencies.
During the pandemic, cruise stocks experienced notable declines due to high levels of debt. Operators were compelled to take on substantial loans and issue equity at low prices to stay afloat during the lockdowns. For instance, Carnival increased its borrowings by nearly $20 billion between 2019 and 2022, closing fiscal year 2023 with a net debt to EBITDA ratio of 6.7 times, up from 2 times pre-pandemic. Similarly, Norwegian saw its ratio more than double to 7.4 times in the same period.
Among the operators, $Lindblad Expeditions (LIND.US)$ exhibited the most leverage, with a net debt to EBITDA ratio of 8.31 times by the second quarter of 2024.
Additionally, falling fuel prices are providing additional relief by boosting free cash flow and potentially shifting enterprise value back towards equity holders. Recently, JPMorgan has upgraded its target prices for cruise stocks, lifting the target price for $Norwegian Cruise (NCLH.US)$ from $23 to $25, and increasing the target for $Royal Caribbean (RCL.US)$ to $213.
Nonetheless, investors should remain cautious about the U.S. economic climate. If consumers become increasingly pessimistic about future economic prospects, they may scale back on non-essential expenditures such as travel and entertainment. Since cruise travel is viewed as discretionary spending, any decrease in demand could adversely affect cruise stock values.
Source: Financial Times, Bloomberg
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Chiefvet45 : Those that go cruising, will always be able to afford this type of holiday, recession will not change how the rich go on vacation
YuFei481 : if you ever calculated whole cruise package cost, especially as family, you will find, cruise trip actually much cheaper than any overseas travel if want similar experience! that's why more people book cruise
Kevin y Wu : Nowadays the cruise rooms are much cheaper than even motels in US, essentially like NY CA