Bernstein analysts initiated coverage on the cruise industry, giving Royal Caribbean (NYSE:RCL) an Outperform rating while assigning Carnival (NYSE:CCL) a Market-Perform rating in a note Tuesday.
The firm highlighted significant changes in the cruise sector, emphasizing operational improvements and strong financial metrics that favor Royal Caribbean as the preferred investment.
According to Bernstein, “Cruise has changed for the better.” Operational advancements, including bigger ships and exclusive private island resorts, have addressed previous demographic and capacity constraints, positioning the industry for ongoing growth, according to the firm.
Bernstein’s analysts believe that financially, the sector has demonstrated robust pricing power and cost discipline, leading to record-high margins and returns. RCL, in particular, now boasts a 15% return on invested capital (ROIC) compared to 10% in FY19.
They state that Royal Caribbean stands out with its strong recovery from pandemic disruptions, delivering an impressive 82% stock gain in FY24.
Bernstein projects a 19% total shareholder return (TSR) for RCL, underpinned by mid-to-high teens EPS growth and operating margins exceeding 35%.
The firm notes that despite its recent gains, RCL has underperformed the S&P 500 and major leisure peers over five years, making its renewed focus on growth a key differentiator.
Bernstein estimates a 23% upside for the stock, supported by investments in larger ships and private destinations that enhance profitability.
Conversely, Bernstein says Carnival lags behind with weaker returns, lower margins, and a slower recovery. “Carnival is hard to consider as a recovery trade,” they note, highlighting that the company’s fundamentals trail RCL’s in both the short and long term.
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