This could be a 'banner year' for cruise stocks. Why Citi says it's time to reconsider the industry as a long-term trade

Published Thu, Feb 2 202310:46 AM EST

After a long port of call, it may be anchors aweigh time for investors in cruise stocks, according to Citigroup. The cruise industry took a beating as countries closed borders and travelers stayed home during Covid-19 lockdowns. But tides have shifted as borders reopen, pent up demand surges and testing requirements ease, meaning 2023 could mark a "banner year" for the industry, the Wall Street firm said. The backdrop is improving so much that analyst James Hardiman said in a Monday note to clients that "cruise stocks as a group have graduated from 'proxy trades' to compelling long-term investment narratives." "Unlike most of our coverage, the post-pandemic momentum of the cruise space clearly outweighs potential macro headwinds in 2023, with budding Asian and European narratives building into 2024," Hardiman said. Hardiman's reasoning for the sentiment shift stems from conversations with travel agents and web traffic trends that indicate strong demand. Some data points also suggest 2023 sailings will likely supersede 2019 levels. Hardiman named Royal Caribbean his top pick, but Norwegian and Carnival also offer decent upside. Royal Caribbean is favored thanks to its solid track record of maintaining costs, and offers the best risk-reward opportunity within the group. "RCL remains our favorite name in the group given the most compelling balance of pricing and cost controls, while also carrying forward the least amount of earnings dilution (debt and equity) from the pandemic layup of the fleet," Hardiman wrote. So far this year, Royal Caribbean shares are off to a solid start, up more than 41% after tumbling about 36% in 2022. Citi reestablished a price target on RCL shares of $80, implying 19% upside from Wednesday's close. Citi rates the stock a high risk buy. Hardiman retained a neutral but high risk rating on Carnival, lifting his price target to $13 from $9 a share. That implies about 15% upside from Wednesday's close. He maintained the same rating and an $18 price target on Norwegian. "Norwegian operates highly regarded premium brands in the cruise space, and so we have little doubt that this customer will rebound nicely as travel restrictions ease and virus concerns subside," he wrote. — CNBC's Michael Bloom contributed reporting