Macquarie Research has upgraded the cruise stocks to Outperform, asserting that “most negative catalysts are in the rear-view mirror.”
2 min
Macquarie Research has upgraded the cruise stocks to Outperform, asserting that “most negative catalysts are in the rear-view mirror.”
Based on valuation, Paul Golding and Charles Yu of Macquarie wrote that they see the most upside in Norwegian Cruise Line Holdings (ticker: NCLH), followed by Carnival (CCL), and Royal Caribbean Group (RCL). They upgraded the stocks from Neutral.
Shares for Norwegian were at $31 and change Tuesday morning, up 4.6% in early trading, while Royal Caribbean and Carnival were also each up more than 4%.
The cruise operators have for the most part been unable to have any sailings for about a year due to the pandemic. A key question is when sailings in and out of U.S. reports will resume. The Centers for Disease Control and Prevention issued a conditional sail order last October, but U.S. sailings haven’t resumed. The cruise companies have suspended their U.S. sailings well into the spring.
Golding and Yu wrote that “technical instructions from the CDC are also forthcoming and could drive more confidence.”
In an email to Barron’s early last month, a CDC representative wrote: “Future orders and technical instructions will address additional activities to help cruise lines prepare for and return to passenger operations in a manner that mitigates COVID-19 risk among passengers, crew members, including simulated voyages, certification for conditional sailing, and restricted voyages.”
Although still well below their pre-pandemic levels in early 2020, the cruise stocks have been moving up as investors get more confident about a reopening of the economy. As of Monday’s close, the stocks of all three companies were up by at least 15% year to date.
Besides forthcoming guidance from the CDC, macro catalysts for the cruise companies include “an expectation of sufficient vaccine efficacy for consumers to feel comfortable engaging in leisure activities.”
“While shares have bounced quite a way off their 1-[year] lows, and barring recession or a sector rerating, the catalysts should trend more positive from here into summer,” they wrote.
The research note points out that Carnival’s announcement last month that it had closed on a $3.5 billion senior unsecured debt offering “bodes well” for its liquidity situation and for the industry’s. “It demonstrates the potential for the group to continue to fund operations even if the suspension gets drawn out,” they noted.
Separately, Carnival announced last month that it had priced an offering for its 40.5 million shares of common stock at $25.10. That adds up to about $1 billion of additional capital, one of various steps the company has taken to shore up its liquidity as its ships sit idle and it burns through hundreds of millions of dollars every month.
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What a quarter-million dollars gets you in the western capital.
Alexandre de Betak and his wife are focusing on their most personal project yet.
4 min
U.S. investors’ enthusiasm over Japanese stocks at this time last year turned out to be misplaced, but the market is again on the list of potential ways to diversify. Corporate shake-ups, hints of inflation after years of declining prices, and a trade battle could work in its favor.
Japanese stocks started 2024 off strong, but an unexpected interest-rate increase in August by the Bank of Japan triggered a sharp decline that the market has spent the rest of the year clawing back. Weakness in the yen has cut into returns in dollar terms. The iShares MSCI Japan ETF , which isn’t hedged, barely returned 7% last year, compared with 30% for the WisdomTree Japan Hedged Equity Fund .
The market is relatively cheap, trading at 15 times forward earnings, about where it was a decade ago, and events on the horizon could give it a boost. Masakazu Takeda, who runs the Hennessy Japan fund, expects earnings growth of mid-single digits—2% after inflation and an additional 2% to 3% as companies return more to shareholders through dividends and buybacks.
“We can easily get 10% plus returns if there’s no exogenous risks,” Takeda told Barron’s in December.
The first couple months of the year could be volatile as investors assess potential spoilers, such as whether the new Trump administration limits its tariff battle to China or goes wider, which would hurt Japan’s export-dependent market. The size of the wage increases labor unions secure in spring negotiations is another risk.
But beyond the headlines, fund managers and strategists see potential positive factors. First, 2024 will likely turn out to have been a record year for corporate earnings because some companies have benefited from rising prices and increasing demand, as well as better capital allocation.
In a note to clients, BofA strategist Masashi Akutsu said the market may again focus on a shift in corporate behavior that has begun to take place in recent years. For years, corporate culture has been resistant to change but recent developments—a battle over Seven & i Holdings that pits the founding family and investors against a bid from Canada’s Alimentation Couche-Tard , and Honda and Nissan ’s merger are examples—have been a wake-up call for Japanese companies to pursue overhauls. He expects a pickup in share buybacks as companies begin to think about shareholder returns more.
A record number of companies have also delisted, often through management buyouts, in another indication that corporate behavior is changing in favor of shareholders.
“Japan is attracting a lot of activist interest in a lot of different guises, says Donald Farquharson, head of the Japanese equities team for Baillie Gifford. “While shareholder proposals are usually unsuccessful, they do start in motion a process behind the scenes about the capital structure.”
For years, money-losing businesses were left alone in large corporations, but the recent spate of activism and focus on shareholder returns has pushed companies to jettison such divisions or take measures to improve them.
That isn‘t to say it is going to be an easy year. A more protectionist world could be problematic for sentiment.
But Japan’s approach could become a model for others in this new world. “Japan has spent the last 30 to 40 years investing in business overseas, with the automotive industry, for example, manufacturing a lot of the cars in the geographies it sells in,” Farquharson said. “That’s true of a lot of what Japan is selling overseas.”
Trade volatility that hits Japanese stocks broadly could offer opportunities. Concerns about tariffs could drag down companies such as Tokio Marine Holdings, which gets half its earnings by selling insurance in the U.S., but wouldn’t be affected by duties. Similarly, Shin-Etsu Chemicals , a silicon wafer behemoth that sells critical materials, including to the chip industry, is another potential winner, Takeda says.
If other companies follow the lead of Japanese exporters and set up shop in the markets they sell in, Japanese automation makers like Nidec and Keyence might benefit as a way to control costs in countries where wages are higher, Farquharson says.
And as Japanese workers get real wage growth and settle into living in an economy no longer in a deflationary rut, companies focused on domestic consumers such as Rakuten Group should benefit. The internet company offers retail and travel, both of which should benefit, but also is home to an online banking and investment platform.
Rakuten’s enterprise value—its market capitalization plus debt—is still less than its annual sales, in part because the company had been investing heavily in its mobile network. But that division is about to hit break even, Farquharson says.
A stock that stands to benefit from consumer spending and the waves or tourists the weak yen is attracting is Orix , a conglomerate whose businesses include an international airport serving Osaka. The company’s aircraft-leasing business also benefits from the production snags and supply-chain disruptions at Airbus and Boeing , Takeda says.
An added benefit: Its financial businesses stand to get a boost as the Bank of Japan slowly normalizes interest rates. The stock trades at about nine times earnings and about par for book value, while paying a 4% dividend yield.
Corrections & Amplifications: The past year is expected to turn out to have been a record one for corporate earnings in Japan. An earlier version of this article incorrectly gave the time frame as the 12 months through March. Separately, Masashi Akutsu is a strategist at BofA. An earlier version incorrectly identified his employer as UBS.
