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Frets about China yields, Caribbean capacity 'excessive': Wells Fargo

Frets about China yields, Caribbean capacity 'excessive': Wells Fargo
Investor concerns about China net yields, terrorism in Europe, higher 2017 Caribbean capacity and long-term capacity are excessive, in Wells Fargo Securities' view.

In a note, the brokerage said this makes a favorable risk/reward scenario for Carnival Corp. (which reports third quarter results Monday) and the cruise sector in general.

Cruise capacity growth in China should moderate to 50% from 60% in 2017, Wells Fargo analyst Tim Conder said. Combined with further distribution development and evidence of continued consumer resiliency, investor concerns will moderate, he added.

In addition, with a modest Europe capacity decrease, driven by fewer berths in the Mediterranean, and assuming no acceleration in terrorist events or intensity, 'we believe Europe could be setting up for a modest upside surprise in 2017,' Conder said.

Caribbean industry capacity growth of 4%, ongoing modest economic growth and the likelihood that North American travelers will not flock back to Europe in significantly higher numbers should set up the industry for low single-digit net yield growth for North America in 2017, Wells Fargo added.

Conder thinks Carnival's Q3 results and guidance 'could provide investors comfort on these issues and reverse overly stretched negative sentiment considering valuation, short interest and favorable Q4 seasonal trading history.'

Wells Fargo adjusted its 2016 and 2017 earnings per share estimates for CCL to $3.39 from $3.34 and $3.88 from $4.14, respectively, with fuel adding 4 cents and foreign exchange a penny per share in 2016, and shaving off 28 cents per share for fuel (with a correction to the realized fuel derivative calculation) and adding a one-cent FX benefit in 2017.

Wells Fargo estimates 2016 net yield will increase 0.5%, up from its prior 0.4% forecast, and held its 2017 net yield projection at a 2.2% increase.

The brokerage's valuation range for CCL goes to $65 to $69, from $70 to $74 previously, on lowered multiples.

'We would be buyers of CCL and [the cruise] sector' ahead of Carnival's Q3 financial report on Sept. 26, Conder said.

On Tuesday CCL shares closed at $45.82, down 37 cents.