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Wells Fargo raises RCL, lowers NCLH estimates, reiterates 'buy' on both

Wells Fargo raises RCL, lowers NCLH estimates, reiterates 'buy' on both

Wells Fargo Securities raised its earnings estimate for Royal Caribbean on solid company and industry fundamentals, particularly in the Caribbean and China. The brokerage lowered its forecast for Norwegian Cruise Line Holdings on costs while also expressing the view that the company's higher cost projection represents reinvesting in ships for long-term, top-line sustainability.

Wells Fargo sees RCL as well-positioned heading into 2016 with bookings ahead in volume and price, a longer booking curve (giving greater visibility), strong on-board spending, Caribbean momentum and higher China capacity.

The Caribbean and China account for about 52% of RCL's 2016 capacity, and strength in both markets and newer ships are more than offsetting a drag from Latin America and Pullmantur, Wells Fargo analyst Tim Conder said.

The brokerage raised its earnings per share forecast for RCL by 2 cents, to $4.82, in 2015, and by 8 cents, to $6.29, in 2016. The valuation range goes to $107 to $112, up from $102 to $107, based on the higher 2016 EPS projection. The valuation is based on a 17 to 17.8 multiple of the 2016 EPS estimate.

Wells Fargo reiterated its 'outperform' (buy) rating for RCL.

Shares closed at $94.36 on Monday.

Wells Fargo fine-tuned its NCLH EPS forecast for 2015 to $2.88, a penny lower than previously, while its 2016 expectation went to $3.95, down from $4.02. The changes reflect 2015 updated net yields, net cruise costs and fuel, and 2016 depreciation and amortization and interest expense assumptions.

The brokerage said NCLH revenue management initiatives are pushing higher organic net yield gains, and cited strength in the company's North American itineraries including the Caribbean, Bermuda and Alaska. NCLH recently raised the midpoint of its 2015 earnings guidance, mostly on a higher net yield outlook.

Wells Fargo cited other positives including 2016 bookings ahead in volume and price, and NCLH management's confidence in achieving long-term targets of $5 EPS by 2017 and 14% return on invested capital by 2018.

Wells Fargo identified negatives as on-going weakness in select eastern Mediterranean itineraries and incremental discretionary shipboard/maintenance costs that offset net yield upside in 2015 and, potentially, 2016.

The brokerage held its valuation range of $65 to $68, a multiple of 16.4 to 17.2 of its $3.95 EPS estimate for 2016, and reiterated its 'outperform' rating.

NCLH closed at $54.33 on Monday.

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