The COVID pandemic has receded into the background, and we’ve got plenty else to occupy our attention these days. But some important industries are still feeling the aftershocks of the pandemic – despite undoubted recoveries.

The cruise industry is one of these. While the overall hospitality and leisure sector is definitely enjoying better times, the world’s major cruise companies are showing idiosyncratic reactions as the vacation market normalizes – although it remains to be seen how the industry will absorb the shock of the recent hurricanes in the Gulf of Mexico.

Most of the cruise lines are showing recent gains in earnings and revenues, and some are also showing powerful stock gains, while some are dealing with debt fallout from the pandemic.

Assessing the current state of the industry, Citi analyst James Hardiman thinks the sector presents solid opportunities. “Our web traffic analysis points to September cruise traffic being among the best on record,” Hardiman recently noted. “Whereas Street narratives/multiplies see strong recent performance as a ‘catch-up trade’, our analysis and data suggest this growth has real legs into ‘25 and beyond.”

Looking toward that long-term horizon, we’ve used the TipRanks Smart Score tool to locate two top-scoring cruise stocks – stocks that Hardiman feels deserve some closer investor attention.

The Smart Score gathers and collates the voluminous market data on every stock, and uses it to rate the share in comparison to a set of factors that are known to predict outperformance. Both of these cruise stocks – Hardiman’s picks for the coming year – have also earned the Smart Score’s ‘Perfect 10’ rating. Let’s give them a closer look and find out exactly why the analyst and the AI algorithm agree that these are compelling buys.

Carnival Corporation (CCL)

First up, Carnival Cruise Corporation, a giant of the modern cruise industry with a 50-plus year history in the business. The company boasts a market cap of more than $25.5 billion, making it the second-largest cruise company plying the seas today. Carnival operates through its various brands, which include such famous cruise-industry names as Princess, Holland-America, and Cunard. Through these brands, Carnival Corporation sails a fleet of 95 modern cruise ships.

Carnival’s brands are well-known, and respected for their modern equipment. The company is also known for its distinctive liveries – Carnival’s eponymous brand sails ships with funnels painted in a red-and-blue scheme, and shaped like a whale’s tale fluke, while Cunard, operating the famous liners Queen Mary 2 and Queen Elizabeth, is known for its black hulls and white superstructures. Passengers boarding a Carnival Corporation ship know what they are stepping aboard.

On the financial side, Carnival Corporation is dealing with more than $28 billion in total debt as of August 31 this year, including debt left over from the pandemic era. At the same time, strong revenues and earnings have allowed the company to pursue a vigorous prepayment plan; since the beginning of last year, the company has prepaid some $7.3 billion of its debt, and in the last reported quarter the prepayments came to $625 million.

That quarter, fiscal 3Q24, saw revenues of $7.9 billion, up more than 15% year-over-year, $80 million ahead of expectations – and a company record for a single quarter. Carnival’s bottom line in Q3 was $1.27 per share in non-GAAP measures, 12 cents better than the forecast. The company also adjusted its full year guidance upward, predicting EBITDA of $6 billion in the quarter. That represents a 40%-plus increase over 2023.

Citi’s Hardiman sees Carnival as a growth picture for investors. He notes that the company’s Q3 results beat expectations, and that Carnival has solid prospects for maintaining this success. Summing up his stance, the analyst writes, “Unlike its peers, the Carnival Cruise story is more of an organic turnaround than it is a new hardware/asset story. To that end, investors perceive CCL to be the slowest growing of the cruise companies. However, the most recent (3Q) results were encouraging, implying that the above-algo trajectory still has some legs beyond what many investors have perceived to be a ‘catch-up’ trade this year. If we can continue to see the current levels of demand persist going forward, the CCL model gets all the more powerful given a minimalistic order book and the potential for outsized de-leverage and ROIC.”

Based on this, Hardiman rates CCL shares as a Buy with a new price target of $28 (up from $25) that implies a 37% increase on the 12-month horizon. (To watch Hardiman’s track record, click here)

Overall, it looks like the bulls are running for Carnival. The stock has 17 reviews, with a breakdown of 14 Buys, 2 Holds, and 1 Sell – for a Strong Buy consensus rating. The stock has a trading price of $20.39 and an average target price of $23.90, pointing toward a one-year upside of 17%. (See CCL stock forecast)

Royal Caribbean Group (RCL)

The second stock we’ll look at is Royal Caribbean, the largest of the world’s cruise lines with a market cap of almost $50 billion. Royal Caribbean, like most of its peers, operates as parent company to a network of brands, among which are the wholly-owned lines Royal Caribbean International, Celebrity Cruises, and Silverside Cruises, and a 50% stake in the joint venture that operates both TUI Cruises and the famous Hapag-Lloyd lines. In addition, Royal Caribbean owns a network of ‘private destinations,’ its portfolio of shore-side resort locations for vacationers.

The company was founded in 1968, and today has become one of the world’s premier cruise lines. It’s known for an innovative approach to the industry, and for operating both huge cruise liners and smaller, more intimate ships. Last year, the company generated nearly $11 billion in total revenue, and is on track to exceed that total in 2024.

The next set of quarterly data from RCL is due out at the end of this month, but the last report, which gave the 2Q24 results, was solid. Revenues, at $4.11 billion, were up almost 17% year-over-year and beat the forecast by $60 million, while the non-GAAP EPS figure, at $3.21, was 46 cents per share better than anticipated. The company published guidance for full-year earnings in the range of $11.35 to $11.45, well above the $11.07 consensus figure.

In addition to these sound results and guidance, Royal Caribbean also reinstated its quarterly dividend. The payment was suspended back in 2020, during the pandemic crisis, but has now been set at 40 cents per common share and scheduled to go out today (October 11). The annualized rate of $1.60 gives a nominal yield of 0.82%, but the key here is not the yield – it’s the company’s confidence in reinstating the payment.

Citi analyst Hardiman is deeply impressed by Royal Caribbean Group’s potential to deliver strong growth. He writes, “As we look to the next three-year period (through 2027), we see no reason that the company can’t achieve $20 per share in EPS. While this would be a bold target at first blush, especially in the context of the 2027 consensus of $16.49, we do not believe that the building blocks are overly optimistic given: (1) RCL’s industry-leading yield trajectory, (2) the company’s first-mover advantage in ‘next-Gen’ land-based assets, (3) a long history of cost controls, and (4) cash flow generation that will be unprecedented for RCL and for that matter the industry.”

At the bottom line, Hardiman writes, “While it remains to be seen whether RCL will go as big as our $20 EPS target when the company lays out its long-term targets, we feel comfortable in saying that Street numbers are far too low.”

Quantifying his own stance, the Citi analyst rates RCL as a Buy, and also meaningfully increased his price target from $204 to $253, a figure that suggests a one-year upside of 31%.

Hardiman says that the consensus numbers are ‘too low’ on this stock – and we should note that the Street’s average price target, $186.08, implies that RCL shares will depreciate by 4% in the coming year. Offering something of a conundrum, the stock still has a Strong Buy consensus rating based on 12 Buys and 3 Holds. It will be interesting to see whether other analysts raise their price targets or downgrade their ratings should the gains continue (the stock is up 50% year-to-date). (See RCL stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.