Overview of the Upgrade#
Morgan Stanley has upgraded Carnival's stock rating to "Overweight" following a significant drop in its share price this year. This decision reflects the bank's belief that the potential for gains now outweighs the risks involved.
Analyst Insights#
Analyst Jamie Rollo stated that the firm's decision comes despite cutting earnings forecasts and lowering price targets. He noted that Carnival's shares have fallen by 28% year-to-date, which is more than the firm's reductions in earnings estimates for the fiscal years 2026 and 2027.
Historical Context#
Rollo compared the current drop in Carnival's stock to past significant declines during events like the Iraq War and the Russia-Ukraine conflict. He pointed out that the company experienced substantial rebounds after those crises ended, suggesting a similar recovery could occur now.
Financial Adjustments#
Morgan Stanley has adjusted its financial expectations, reducing its revenue yield assumption for fiscal year 2026 by 1% to 2.0%. The bank cited weaker demand in Europe but noted that there have been no widespread cancellations of bookings so far. Additionally, it highlighted that Carnival's exposure to the Middle East is limited, accounting for only 1-2% of its capacity. The firm also mentioned that fluctuations in oil prices significantly impact earnings, with every $10 increase in oil affecting earnings per share by 5%.
Price Targets and Future Outlook#
Despite lowering the price target for Carnival's stock to $31 in the U.S. and 2,350 pence in the U.K., Morgan Stanley believes the current situation resembles past demand shocks. Historically, declines of around 30% have led to rebounds of 40-120%, which gives the firm confidence in its upgraded rating for Carnival.