Full Steam Ahead

Morgan Stanley $MS ( ▼ 0.24% ) upgraded Carnival $CCL ( ▲ 3.23% ) to Overweight and revised its price target to $31.

Analyst Jamie Rollo called the stock's sharp decline since the US-Iran war began a compelling entry point. Carnival is sharply lower since the conflict started.

However, Rollo noted that comparable declines following the 2003 Iraqi War, the 2010 Arab Spring, and the 2022 Russia-Ukraine conflict were each followed by rebounds of 40% to 120% over the next 12 months.

Rollo argued that Carnival and the broader cruise industry are better equipped to manage a potential downturn than in past cycles.

He pointed to cruising's pricing flexibility, strong free cash flow, and the appeal of its core destinations: the Caribbean, Western and Northern Europe, and Alaska. Morgan Stanley also cited the relative value of cruising compared to other vacation options as a demand stabilizer, even amid the ongoing conflict.

The industry's improved financial footing, Rollo argued, gives it a more resilient floor than in prior downturns.

The upgrade comes with a caveat.

Rollo expects Carnival's earnings report next Friday to deliver a cautious outlook and a guidance cut, driven by elevated oil prices. He also trimmed his net revenue yield forecast, citing softer demand in Europe tied to the war.

But big picture, Rollo believes the bad news is already priced in. The market has sounded the alarm. Morgan Stanley is ringing the dinner bell.