We Lower Our Cruise Company Moats From Narrow to None
We also lowered our fair value estimates for these companies and see their competitive advantages waning from the impact of COVID-19.
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.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.