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JPMorgan: 2 Cruise Line Stocks to Buy, and 1 to Watch From the Sidelines

Few industries have been hit by COVID-19 as hard as the cruise industry, but the situation may be turning around. The industry is starting to reopen, partly on customer perceptions that corona is beginning to recede, and partly on business recognition that companies cannot live on credit forever. The cruise line companies are taking precautions, and measures to improve health and prevent the spread of disease in the close quarters of a cruise ship include better ventilation systems with upgraded air filtration, simplified itineraries, and – where possible – a move toward smaller vessels. For passengers, this will likely mean forgoing buffet lines and finding smaller crowds aboard ship. For the cruise lines, it means the restart is moving slowly. For investors, of course, there is a different set of questions. Some of these were addressed by JPMorgan analyst Brandt Montour. “We continue to see value in shares for longer term investors in general, especially if one believes that operators can sail full in 2022 with only moderate pricing damage,” the analyst noted. Montour has picked out two stocks that are worth the risk, and one that investors should avoid for now. Using TipRanks’ Stock Comparison tool, we lined up the three alongside each other to get the lowdown on what the near-term holds for these cruise line players.Royal Caribbean (RCL)First up is Royal Caribbean, the world’s second-largest cruise line. RCL has not flinched from directly facing the challenges of the pandemic, putting its corporate focus on maintaining liquidity and using the ‘downtime’ of the pandemic to streamline and modernize its fleet.Back in June, that first priority led the company to renegotiate over $2.2 billion in existing debt, and more recently, management secured a binding loan commitment from Morgan Stanley for a $700 million credit facility. The facility is available for drawing any time before August of next year – and can even be extended by an additional $300 million. These moves add substantially to RCL’s cash position, and its ability to fund operations pending the revival of ticket sales.RCL has managed to stave of bankruptcy through its loan negotiations, and gives the company room to plan for resuming active cruise operations. In addition, RCL has partnered with Norwegian Cruise Lines to author a 66-page report submitted to the CDC earlier this summer, giving industry recommendations on how to restart cruises safely. Recommendations include required face coverings on board ship, daily temperature checks, and COVID testing of passengers and crew. In his latest note on RCL, JPM’s Montour makes three key observations. First, relating to the company’s ability to quickly restore ships to service, he says, “RCL’s current lay-up position should allow it to restart ‘relatively quickly’ but with moderately slow/measured capacity ramp from there.”Moving on to the company’s prospects for bringing customers on board, Montour points out that “RCL believes that the lift in financial markets has helped its core customer feel relatively confident, customers have saved up a lot of 2020 vacation money, and are willing to pay pre-COVID-19 ticket prices and better.”And finally, regarding on-board safety, Montour notes that RCL’s ships, which have a capacity for 110% occupancy, can afford to operate at 50%. He writes that the “addition of an extra entertainment show, and extra dining/seatings, will be a meaningful help in managing distancing. [The company] believes its previous investments in onboard and mobile technology will accelerate its capabilities with distancing initiatives, and it won’t have to make as many additional investments as perhaps peers.”To this end, Montour calls RCL a ‘top pick’ and rates it an Overweight (i.e. Buy). (To watch Montour’s track record, click here)Overall, RCL has a Moderate Buy rating from the analyst consensus, with 7 Buys, 5 Holds, and 2 Sells. The stock is currently priced at $64.04; it is a measure of how difficult this niche is right now that the average price target for the shares is only $58.08. (See RCL stock analysis on TipRanks)Norwegian Cruise Line (NCLH)The next stock is Norwegian Cruise Line, the third largest of the world’s major cruise lines. Norwegian entered the COVID crisis with some important structural advantages over its competition. Its fleet was smaller, and the vessels somewhat newer, implying lower costs for maintenance. In addition, there were no new launches scheduled until 2022, which also worked keep costs down.Like RCL above, Norwegian has also been successful on the liquidity front. As of June 30th, the company had $2.5 billion of total liquidity,…