Accelerating improvement of the Carnival Cruise Line brand and benefits from further cost-savings initiatives are other factors in CCL's favor, Wells Fargo said in a note.
However, the brokerage thinks the cruise sub-sector collectively presents the best attractive overall risk reward within its coverage.
Despite headwinds from fuel costs and foreign exchange, cruise stocks are well positioned given their 2016 collective 2,650 basis points market underperformance, Wells Fargo analyst Tim Conder said. He also cited the industry's modest net 4% to 6% annual capacity growth through 2020 and solid execution by Carnival and Royal Caribbean on costs and global deployment/sourcing diversification.
In addition, investments in the on-board product, customer relationship management and marketing are expected to enhance revenues, the core US and European markets are strengthening and there's likely negligible impact from pending tax legislation, Conder said.
Plus, Wells Fargo noted the cruise operators' leverage is declining, with Carnival at the lowest and Royal Caribbean expected to achieve investment-grade status in the second half of the year. Norwegian Cruise Line Holdings' leverage is peaking.
'We believe a likely reversion to the historical inverse relationship between fuel and the US dollar will occur in 2017, providing upside to current expectations,' Conder said. He put geopolitical issues as the sector's primary risk.
Wells Fargo rates CCL, RCL and NCLH 'outperform' (buy).
On Wednesday CCL closed at $53.60, up 81 cents; RCL at $85.51, up 61 cents; and NCLH at $45.67, 70 cents higher.
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