Morgan Stanley: Weak demand in China and Europe to hit Carnival

Published Fri, Sep 2 201611:55 AM EDTUpdated Fri, Sep 2 20161:36 PM EDT

Morgan Stanley slashed its 12-month price target on Carnival by 11 percent to $54 on Friday, downgrading the stock to "underweight" from "equal-weight" on concerns over weak demand from Europe and China, and in the Caribbean due to the Zika virus. "Our monthly agents survey suggests cruise demand weakened in August, with prices also softening," equity analyst Jamie Rollo wrote in a note to clients. "With the industry orderbook at a record high, Europe/China likely to stay weak and Caribbean risks rising, we see yields continuing to slow." The analyst believes the pace of cruise bookings for the rest of 2016 and 2017 has already slowed down, despite aggressive pricing promotions and other marketing incentives from cruise lines. Additionally, concerns over the Zika virus outbreak in the Caribbean could also put a dent in sales, Rollo said, further adding pressure to the existing weak demand. Carnival, 1 year Source: FactSet This year, shares of Carnival dropped 15 percent compared with a gain of 7 percent for the S & P 500 . Part of the underperformance stemmed from softening demand in Europe due to geopolitical events that have put off travelers, particularly from North America, who make up 20 percent of Carnival's European fleet, according to Rollo's estimates. "It looks like 2017 could be worse than 2016, as the NA [North American] cohort book earlier and spend more than Europeans, so changing the passenger mix will likely mean average yields fall again," said Rollo. Similarly, the analyst thinks that capacity growth may have exceeded demand in China, causing margins to compress due to lower pricing power. "If China cannot grow to the government's target of 5m passengers by 2020, this will mean many of the ships on order will end up in developed markets, where the picture is somewhat mixed," according to Rollo, who's concerned about this trend, especially because of large orders for new ships already in place. "So whichever way we cut it (berths / passengers / capital), there is a significant amount of new capacity set to sail," he said. — CNBC's Michael Bloom contributed to this story.

Carnival cruise ship Destiny in port in Key West, Fla.

Karen Bleier | AFP | Getty Images

"Our monthly agents survey suggests cruise demand weakened in August, with prices also softening," equity analyst Jamie Rollo wrote in a note to clients. "With the industry orderbook at a record high, Europe/China likely to stay weak and Caribbean risks rising, we see yields continuing to slow."

The analyst believes the pace of cruise bookings for the rest of 2016 and 2017 has already slowed down, despite aggressive pricing promotions and other marketing incentives from cruise lines.