JPMorgan double downgrades Royal Caribbean Group, says it’s ‘more vulnerable’ to macro pressures

Sell shares of Royal Caribbean Group as they could fall 20% from here, JPMorgan said Tuesday. Analyst Daniel Adam double downgraded shares to underweight from overweight, and slashed his price target, saying that Royal Caribbean is “more vulnerable” to macro pressures than its peers because of its future capital commitments. “We are moving to an Underweight rating on RCL,” Adam wrote the research note. “Our expectations have largely been tempered by (1) RCL’s elevated leverage (7.7x 2023E net debt-toEBITDA, vs. 6.8x for CCL and 7.0x for NCLH ), and (2) the magnitude and timing of future capital commitments (new ships and RCL’s 2023-25 debt maturities).” In fact, the analyst said that Royal Caribbean could face a roughly $400 million funding shortfall by the end of 2023, even after raising about $10 billion in capital and tapping its free cash flow to cover those commitments, according to the note. At the same time, the cruise line operator will have to raise an additional $3.5 billion to achieve its investment grade rating target by 2025, according to the analyst. “At current levels, a $3.5b equity deal would be ~20% dilutive to shareholders. In other words, additional equity and/or high interest-bearing debt raises are distinct possibilities over the next 1-2 years,” Adam wrote. To be sure, Royal Caribbean has some advantages, including an 18% share of the cruise market that is expected to have a better setup heading into 2023. Still, the analyst said he prefers competitor Norwegian Cruise Line Holdings. Shares of Royal Caribbean are down roughly 22% this year. The analyst’s December 2023 price target of $47, cut from the December 2022 price target of $106, suggests roughly 20% downside from Monday’s closing price. The stock is down more than 2% in Tuesday premarket trading. –CNBC’s Michael Bloom contributed to this report.