'Upside Ahead': Wells Fargo Says These 2 Cruise Stocks Are Set to Sail North

The global cruise industry presents an interesting picture. While it has yet to fully recover from the disruptions of COVID-19, passenger volumes and revenues have been climbing consistently in recent years. Grand View Research valued the market at $7.67 billion in 2022 and projects it will grow to $18.3 billion by 2030, reflecting an estimated 11.5% CAGR over the forecast period.

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Data from the Cruise Lines International Association also points to a constructive outlook. ~ 58% of international cruise passengers are first-time travelers, a key indicator, as newcomers often return for additional voyages. This expanding customer base is supported by several drivers, including the appeal of visiting multiple destinations in a single trip and the relative value cruises offer compared to many land-based vacations.

Wells Fargo analyst Trey Bowers has all of this in mind when he writes of the leisure industry: "We view the cruise sector as the most compelling in our coverage, given rapidly improving returns on invested capital (ROIC) at both the company and overall industry level. We believe the total addressable market (TAM) of cruise will continue to expand, and private island attractions in the Caribbean have and will drive higher levels of demand, while simultaneously expanding supply. We see upside ahead for the industry…"

With that backdrop, Wells Fargo is pulling the trigger on two leading cruise stocks, each offering double-digit upside potential. Using TipRanks' data, we reviewed how the rest of Wall Street sees these names. Let's dive in.

Royal Caribbean (RCL)

Royal Caribbean Group, the first stock we'll look at here, is the leader in the global cruise industry. The company is the largest among its peers, with a market cap of $67.3 billion, and operates a large, modern fleet of 68 ships, organized under five brand names. The company's brands include its eponymous Royal Caribbean; Celebrity Cruises, which also operates Celebrity Cruises River; and Silversea. In addition, the Group owns a 50% stake in TUI, a joint venture that controls the German cruise brands Mein Schiff and Hapag-Lloyd. That last name is one of the most famous names in the cruise line industry, and dates back as far as 1847.

The company's largest brand, and the best-known, is Royal Caribbean. Operating 34 ships, this cruise line accounts for half of the Group's total fleet. Celebrity Cruises is the company's second-largest brand, with 14 ocean-going cruise ships and 2 specialized ships for river cruises on Europe's storied Rhine and Danube rivers. Silversea, Mein Schiff, and Hapag-Lloyd operate smaller fleets. The common denominator is modern facilities aboard the vessels, and a wide range of accommodations, activities, and luxuries to meet the needs and budgets of every cruise traveler.

Through its brands, the Royal Caribbean Group takes its passengers to destinations all over the world, from pole to pole along the shores of all seven continents. The company also operates a portfolio of private destinations, linked to the cruise lines. During the third quarter of this year, the Royal Caribbean Group expanded its private destination set with the announcement of the Royal Beach Club Santorini, on the Aegean Sea, and scheduled to open next year.

Royal Caribbean brought in $5.1 billion in total revenue during the third quarter of this year, a figure that was up 4.3% year-over-year – but missed the forecast by $29.34 million. At the bottom line, the company's non-GAAP earnings figure, $5.75 per share based on an adjusted net income of $1.6 billion, was 7 cents per share better than had been expected.

For Wells Fargo analyst Trey Bowers, all of this adds up to a confirmed industry leader. He notes that Royal Caribbean has shown solid growth in recent years, and has sound prospects for continued success. Bowers writes of the cruise line company, "We expect continued best-in-industry yield growth, driven by continued high levels of demand at existing and new private islands as well as the Legend of the Seas introduction next year. RCL led the industry in yield growth from 2019 to 2025E, and we believe this could continue over the next 5 years. We believe RCL's industry-leading multiple (outside of VIK) should continue to move higher as ROIC continues to expand against flat-to-down cost of capital… We believe a stock creating this much growth and economic value should not trade at such a deep discount to the market. RCL is our Top Idea in our coverage universe."

These comments back up the analyst's Overweight (i.e., Buy) rating on RCL, and his $320 price target points toward a one-year gain of 27%.

The 17 recent analyst reviews on record for RCL include 13 to Buy and 4 to Hold, for a Strong Buy consensus rating. The stock has an average price target of $343.87 and a current trading price of $251.42, a combination that yields a 37% upside potential for the next 12 months. (See RCL stock forecast)