Nomura Sees 25% Upside In Carnival: Few Consumer Sectors 'Offer Such Growth At Such Reasonable Multiples'

• In a report published Wednesday, Nomura analysts Harry C. Curtis, Brian H. Dobson and Kelvin Wong upgraded their rating on Carnival Corp CCL from Neutral to Buy, while boosting their price target from $53.00 to $62.00.
• They assure the recent weakness seen in the stock creates and opportunity to enter it.
• Shares of Carnival are up about 2.7 percent on Wednesday trading.

Since early 2013, Royal Caribbean Cruises Ltd RCL has more than doubled in value and Norwegian Cruise Line Holdings Ltd NCLH has returned more than 140 percent. Meanwhile, Carnival has only gained about 30 percent -- versus the S&P 500’s 27 percent rise.

However, the analysts believe that, going forward, the latter will “outperform the market significantly,” driven by several elements:

1)   They estimate 25 percent CAGR EPS growth through 2017, driven by a 6 percent surge in the top-line (3 percent yield improvement and 3.5 percent unit growth).

2)   Costs are moderating to under 1 percent/ALBD per year.

3)   Free cash flow and ROIC are also on the rise. This provides an opportunity for higher returns.

4)   Earnings growth seems to be “well ahead of forward valuation” yet Carnival is “under-owned by many large-cap growth funds.”

So, basically, Nomura analysts believe Carnival’s EPS growth through 2017 “should be materially higher than their multiples reflect (~15x).” In addition, ROIC and free cash flow are surging, and balance sheets remain strong. Thus, they conclude, “there are few consumer sectors that offer such growth at such reasonable multiples.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.