SunTrust Report Makes Waves in The Cruise Line Sector

SunTrust came out with a report Friday morning initiating coverage on the cruise line industry with a Neutral view overall.

Analyst Patrick Scholes supported his rating with a few key points:

1. A negative supply/ demand spread has given the industry weak pricing power, which is expected to continue for at least two more years.

2. The industry's incident risk is really unique to the cruise line business. Rarely would you find ship breakdowns or sinkings as major risks for a company. Scholes stated that this risk should be taken into account and be used to discount valuations slightly as he expects these incidents to continue.

3. Scholes also stated that he believes the whole industry should trade at a discount to the S&P 500 due to its low growth potential, average returns, and above average headline risk.

Zooming in a bit, Scholes rated Norwegian Cruise Line Holdings NCLH with a Buy rating and a $46 price target, giving the shares a staggering 47 percent upside.

The bullish report was focused on an expected earnings growth of 70 percent in 2014, and 30 percent in 2015 and 2016, giving the stock a multiple of roughly 15.5x over the next 12 months.

Royal Caribbean RCL received a Neutral rating and a $44 price target, giving the shares an upside of roughly 14.5 percent from Thursday's close.

While Scholes expects Royal Caribbean to successfully achieve flat costs this next year, he believes pricing pressure is greater than street consensus. He went on to say that the street consensus would need to come down a bit before he got truly bullish on the name.

On the bearish side, Scholes rated Carnival Corporation CCLwith a Reduce rating and a $26 price target, giving the shares a downside of roughly 24 percent from Thursday's close.

Leading him to stick his neck out and be the only Sell equivalent rating on the street was proprietary pricing data showing that its pricing power is even weaker than its poor guidance suggests, leaving estimates far below street consensus.

Following the report, Norwegian Cruise Lines traded up 4.05 percent to $31.78, Royal Caribbean rose 1.37 percent to $38.60, and Carnival dropped slightly, falling 0.26 percent to $32.28.