Why this travel stock remains JPMorgan’s favorite as leisure travel continues to boom

The outlook for travel stocks remains “more positive than not,” according to JPMorgan analyst Daniel Adam, but given the macroeconomic and financial concerns in the sector, not all The name is worth buying.

He covers cruise stocks on Tuesday, keeping an oversized rating on Norwegian Cruise Line Holdings Ltd.

and a neutral review of Carnival Corp.,
while also lowering JPMorgan’s rating on Royal Caribbean Group

to underweight from overweight.

In his view, Carnival and in particular Royal Caribbean “are more vulnerable to price drops and the short-term influx of financial market conditions given the size and duration of future capital commitments.” futures (new ship orders, principal payments on maturing debt),” Adam wrote.

His analysis of valuation data suggests that Norway will benefit from higher share prices at least over the next year, while he expects that Carnival could see prices stabilize and says Royal Caribbean could decrease can be seen.

Norway, he writes, “has a smaller, more agile and younger fleet at a premium price,” and although the company does not enjoy the benefits of scale as rivals due to a smaller share of capacity, but it “has a larger opportunity for growth, which we consider positive amid strong pent-up leisure travel demand and the compelling value proposition that travel routes offer compared to other alternatives to land holidays.”

Adam noted that Carnival’s shares have lagged behind Royal Caribbean and Norwegian so far this year, down 52% since the publication of his note, compared with a roughly 22% to 23% drop for the two remaining names. That underperformance is “largely justified,” according to Adam, taking into account factors such as the company’s older fleet and fuel costs, since the company does not hedge against prices.

“Despite its challenges, CCL is by far the largest, most diversified cruise line operator, and the combination of high leverage and industry-leading size can ultimately be achieved,” he writes. caused its share price to outperform during periods of growth. “However, for us to be more bullish on the stock, we need to be confident that the short-term occupancy gains won’t come at the expense of longer-term valuations.”

As for Royal Caribbean’s downgrade, he is concerned about the company’s relatively larger leverage, which could require additional capital gains to be made through share purchases or through asset sales. .

“At current levels, a $3.5 billion equity deal would have a ~20% impact on shareholders,” Adam writes. “In other words, additional equity and/or increased high-yield debt are obvious possibilities over the next 1-2 years.”

Shares of Royal Caribbean fell 1.8% in Tuesday morning trading, while shares of Carnival fell 1.0% and Norway’s were down 0.5%.


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