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Norwegian Cruise Line Holdings shares rise on UBS upgrade to 'buy'

UBS upgraded Norwegian Cruise Line Holdings from 'neutral' to 'buy,' with a $15 price target, down from $18 on inflation costs and a more conservative multiple.

The brokerage cited a 'significant improvement in bookings' in the company's third quarter preview, 'showing it has caught up to the other cruise lines in occupancy while still keeping price nicely ahead of 2019 levels.'

In a note, UBS analyst Robin Farley said NCLH pre-reported Q3 occupancy of 82%, 'up significantly from 65% in Q2, catching up to CCL’s reported 84% in Q3, while NCLH says they will report net revenue per cruise day growth of up low single digit and gross revenue up high single digit, while CCL reported gross and net revenue per cruise day down 4% versus 2019.'

NCLH trades up nearly 7%

NCLH shares rose 7%, to $12.44, in Wednesday morning trading.

Market close update: The stock closed at $12.98, up $1.35, or 11.6%.

UBS now considers all cruise stocks in its coverage 'overweight' with a preference for Royal Caribbean Group 'due to its stronger occupancy recovery, record pricing on bookings both in second half '22 and 2023, and lowest near-term maturities.

'We see NCLH as our next most preferred name due to relatively greater concentration of domestic passengers sourced and strong pricing given its higher exposure to the luxury segment,' Farley said.

She views Carnival Corp. 'at risk of underperforming on yield growth relative to the other two cruise companies because of its greater European passenger sourcing as well as the strengthening US dollar,' but still sees upside for CCL as demand recovers.

Estimates adjusted for inflation

The brokerage adjusted all its cruise line models for 'slightly higher expense' due to inflation. UBS revised its CCL estimate following the company's Sept. 30 quarterly report and is now doing the same for RCL and NCLH. Farley also adjusted for fuel price changes for RCL and NCLH.

For NCLH, the 2022 earnings per share estimate goes to a loss of $4.66, narrowed from a loss of $4.97 prior, while the 2023 EPS is now at $1.55, up from $1.44.

2023 net yield estimate vs. 2019 up for NCLH and RCL, down for CCL

Farley projects NCLH 2023 net yield as up 1.5% compared to 2019, a change of 300 basis points from her prior assumption of down 1.5%.

For RCL, 2022 EPS moves to a loss of $6.58 from a loss of $6.76 prior, and 2023 EPS to $4.29, from $4.22. The brokerage's net yield assumption for RCL in 2023 is up 2.5% compared to 2019, an increase of 270 basis points from the prior assumption of roughly flat versus 2019.

For CCL, UBS left its 2022 estimate unchanged at a loss of $4.66, and trimmed its 2023 EPS estimate to 60 cents from 72 cents previously. Farley now assumes CCL net yield in 2023 to be down 4% versus 2019, a decline of 100 basis points from her prior assumption of down 3%.

Valuation goes to low end of historical range

UBS also moved valuation to the low end of the cruise stocks' historical range of approximately 12 to 14 times earnings due to 'economic uncertainty and above normal leverage levels.'

This puts the NCLH price target at $15, from $18 previously, based on the brokerage's updated multiple range of 12 to 14 times EPS, lowered from 14 to 16 times prior.

The new 14 to 16 multiple range puts RCL's price target at $56, down from $65 previously, and CCL's at $8, down from $11.