Carnival (NYSE:CCL) is down today after Susquehanna Financial Group initiated a bearish take on the stock. While the firm thinks Wall Street will see the travel sector recover, it doesn’t think that all cruise and airline stocks have the same growth potential. But while Susquehanna maintains a neutral stance on CCL stock, it has issued positive coverage for both Norwegian Cruise Line Holdings (NYSE:NCLH) and Royal Caribbean Cruises (NYSE:RCL).
What’s Happening With CCL Stock
Carnival is a company that can’t catch a break. Its industry has been plagued by Covid-19-driven turbulence for months. Now even as demand for travel starts to slowly rebound, broad market forces are pushing CCL stock down again. Shares fell yesterday after the cruise line industry lost a battle over a new environmental regulation.
Investors did not need a reason to be bearish on a turbulent cruise line stock. But Susquehanna’s report has presented them with a new one. CCL stock fallen steadily today and is set to close out the day down about 9%.
Let’s take a look at the report in context.
CCL Stock Won’t Be a Smooth Ride for Investors
As Susquehanna investment analyst Christopher Stathoulopoulos sees it, investors shouldn’t avoid cruise line stocks but they should be selective. And for his team, that means favoring RCL and NHCL for their history of growth. The firm has issued positive ratings for both stocks while assigning CCL stock a “neutral.” It also sees the stock as having an upside of only 16%, compared to the 30% and 32% it sees for RCL and NCLH respectively.
“We prefer liners that have attributes that we believe could help mitigate cyclical pressures and rising geopolitical risk,” the analyst notes. He adds that: “With pricing power (and integrity) key for driving a recovery in earnings, we prefer RCL and NCLH given their track record of supporting capacity and yield growth.”
The looming recession has cast dark storm clouds over companies that operate in the luxury goods and service space. But the report makes clear that CCL stock is seen as the least stable in its peer group. InvestorPlace contributor Faisal Humayun recently noted, the company’s financials raise plenty of red flags. As he notes:
Carnival has a stressed balance sheet and it would take years to reduce the debt servicing cost significantly. In an environment of rising interest rates, the company faces higher debt servicing cost on potential debt refinancing.
Humayun added that the rising costs of fuel and food could place margin pressure CCL stock, something that Susquehanna’s report does not focus on.
Stormy Seas Ahead
Even if the industry landscape does clear up, it’s hard to be optimistic about Carnival’s chances for growth. Between the increasingly bearish energy surrounding CCL stock and its own troubling financials, there is little to recommend it. Even if the more daring investors are looking for bullish plays on the cruise line sector, they aren’t likely to be drawn to a company with such a checkered recent history.
Susquehanna makes a strong case for why Carnival’s competitors are better bets for the upcoming tourist season. Investors would be wise to pay attention to it, not jump into the stormy waters that CCL has become.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.