We Lower Our Cruise Company Moats From Narrow to None

We’ve reduced our moat ratings for Carnival CCL, Royal Caribbean RCL, and Norwegian NCLH to none from narrow. While the cruise operators have historically benefited from the combination of brand intangible assets, cost advantages, and efficient scale moat sources, we believe these factors have been degraded, hurt by the global spread COVID-19 and its corresponding travel restrictions. Moreover, we fear secular changes to behavior surrounding travel as a result of COVID-19 is set to alter the economic performance of the cruise companies over an extended horizon. As consumers resume cruising after a four-month no-sail halt (that could be prolonged), we think cruise operators will have to reassure passengers of both the safety and value propositions of cruising. On the yield side, we expect firms to see extended pricing pressure to entice cruisers back onto the product after COVID-19 subsides. And on the cost side, higher spend to implement tighter cleanliness and health protocols could initially inflate spending. These factors will be compounded by staggered reintroductions of the complete fleet.

As a result, we’re lowering our Carnival fair value estimate to $20 (from $40), our Royal fair value estimate to $52 (from $90), and our Norwegian fair value estimate to $26.50 (from $42), but these valuations still exceed current trading levels. The reduction results from the shorter time horizon for excess returns and lower sales and profit growth the next few years. More specifically, we have slashed our 2020 earnings per share as a result of the CDC's extended no-sail order that could take the majority of ships off the seas for most of 2020. We don't think hardware is likely to be fully deployed until at least the end of 2021, with passenger capacity not reaching 2019 levels for at least two years (2022). We assume the risk from COVID-19 proves transitory over time, like prior viral events, but believe the consumer recovery could take longer given the global nature of this event.

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