It’s been a good year for cruise stocks. The industry, which suffered from shutdowns during the Covid-19 pandemic, is now benefiting from travelers’ pent-up demand. That’s leading to some upgrades by Wall Street analysts and new highs for the stocks. Carnival and Norwegian Cruise Line hit 52-week highs on Wednesday, while Royal Caribbean did so on Tuesday. “We are not seeing any sign of weakness from our guests. If anything, we’ve seen acceleration, not just in terms of demand but also their willingness to pay,” Royal Caribbean CEO Jason Liberty told CNBC in May. Carnival is up about 94% year to date, Royal Caribbean has gained 92% and Norwegian is 59% higher. That’s a big turnaround from last year, when both Royal Caribbean and Carnival sank more than 40% and Norwegian lost just over 30%. Yet some analysts think there may be more room to run. Biggest recovery in travel this year The cruise industry is the last in the travel sector to rebound from the pandemic. After being shuttered for more than a year during Covid, myriad restrictions kept passengers away once ships were allowed to again set sail. “This is the first full year of real recovery that we have seen,” said Truist analyst C. Patrick Scholes, who said the floodgates opened after travel restrictions were lifted in the fall of 2022. “No other sector in the U.S. economy had to follow those regulations. It was very, very targeted to the cruise lines,” echoed UBS analyst Robin Farley. “It was underappreciated by the investors how much that impacted demand and how much the lifting of that has been a driver for demand.” She believes cruise stocks are on track for perhaps the biggest recovery in travel this year. ‘No signs of softness’ Wall Street has noticed. On Monday, Carnival was upgraded by JPMorgan Chase and Bank of America — which sent shares of all three cruise stocks higher. Both firms met with senior management of Carnival, Norwegian and Royal Caribbean. “All management teams spoke to continued demand momentum with no signs of softness cited in any single forward indicator by historical measure,” wrote JPMorgan analyst Matthew Boss. “Importantly, management teams broadly cited today’s booking curve as in the sweet spot (historically, ~6-9 months) providing ~85% visibility into 2023 bookings and ~25% into 2024 as of today by our math.” CCL YTD mountain Carnival year to date Boss upgraded Carnival to buy from neutral and raised his price target to $16, implying about 4% upside from Tuesday’s close. While he kept neutral ratings on Royal Caribbean and Norwegian, he increased their price targets to $103 and $16, respectively. That implies 7.5% upside for Royal Caribbean but nearly 18% downside for Norwegian. Bank of America’s Didora cited the stability of the cruise recovery, the reduction of balance sheet risk and Carnival CEO Josh Weingstei’s streamlining of the Miami-based company among his reasons for an upgrade to buy from neutral. He also raised his price target to $20, suggesting the stock can rally about 30% from Tuesday’s close. Didora also boosted his price targets on Royal Caribbean, to $95 from $82, and on Norwegian, to $19 from $17. Both are roughly in-line with Tuesday’s close. He maintained his neutral rating on the stocks. “In our opinion, the cruise industry’s long booking window and strong current demand could allow it to be less susceptible to a slowdown in the leisure consumer relative to other areas of travel,” said Didora. Meanwhile, UBS analyst Robin Farley’s top pick is Royal Caribbean, although she also has a buy rating on Carnival. She increased her price target on Royal Caribbean in May to $103 per share from $91. RCL YTD mountain Royal Caribbean year to date For Farley, Royal Caribbean stands out because it has about 64% of its cruises in the Caribbean, a strong market. In addition, its private island CocoCay contributes to the company’s revenue thanks to a water park, zip lining and other activities, she said. Also in May, Argus Research upgraded Royal Caribbean to buy from hold. The Wall Street firm cited Royal’s high cruise occupancy in the first quarter, which is likely to result in stronger-than-expected revenue and earnings for the year. Meanwhile, Truist’s Scholes is sticking with his buy rating on Norwegian because of its exposure to luxury spending. Consumer spending ‘continues to run hot’ With cruises back in play, travelers have more options than simply booking a hotel room or vacation rental property. While consumer spending on lodging seems to have peaked, late-recovery sectors like cruises “continue to run hot,” Didora said in a separate note. Cruise spending in May was up 17.3% compared to the same month in 2019, the last pre-pandemic year, according to Bank of America aggregated credit and debit card data. While spending remained solid, there was some modest sequential softness outside of the Caribbean, Didora said. Separately, Citi’s proprietary weekly credit card spending data shows 19% growth in mid-May compared to 2019. “While the growth trend has decelerated slightly from late 2022/early 2023, it has largely been stable in the +15-25% range in most weeks from March through mid-May,” wrote Citi analyst James Hardiman. The lifting of restrictions in the fall of 2022 led right into wave season, which starts after the holidays and continues into the end of March, a period usually marked by promotional deals. Meanwhile, industry-wide cruise pricing grew 9% compared to May 2019 — up from 7% year-over-year growth in March and April, according to Citi. “Despite recent strength in pricing, the cruise group has seen far less cost inflation than other leisure sectors; as such, we see relative value in the cruise group, which is increasingly our favorite sub-sector as we make our way through an uncertain 2023,” wrote Hardiman. In fact, cruises are an even better deal than usual, Truist’s Scholes said. “Historically cruise lines have offered a bit of a better value versus land-based accommodations,” he said. Usually it’s discounted about 10% to 20%, but now it is about 50% thanks to that delayed recovery, he noted. NCLH YTD mountain Norwegian year to date That may appeal to inflation-weary Americans who still want to travel, yet are reining spending. In a recent poll by Wolfe Research, more than 90% of those taking a cruise this year felt it offered a better value, analyst Greg Badishkanian wrote in a May 31 note. The Wall Street firm surveyed over 1,000 U.S. consumers. “We think this should support cruise pricing into the future,” he said. Also supporting future pricing is the fact that booking cancellations are down 30% over the past couple months from comparable levels in 2019, Scholes said in a May 30 note. That means cruises aren’t cutting prices as departure dates get closer and consumers are booking farther out, he said. “Consumers realize that besides the limited cruise inventory they cannot wait to book last-minute due to airfare prices that only get more expensive the longer one waits to book. Reflecting the strong pace of bookings for 2024 and 2025, the booking window (book to depart) is approx. 230 days at the moment, up nearly 60 days since last fall,” Scholes wrote. Dealing with debt For their part, the cruise lines themselves are focusing on the billions of dollars of debt they took on to survive the pandemic. “You need to have a continued recovery here,” Scholes said. “If the trajectory we see today continues, maybe in another two to three years they will probably get balance sheets back to where they were.” Managements at Royal Caribbean, Norwegian and Carnival all told JPMorgan their top capital allocation focus is paying back debt, deleveraging the balance sheet and avoiding any new equity issuance, Boss said. “Importantly, on free cash flow – we estimate all three operators to inflect to positive free cash flow generation beginning in 2024 (average of ~$1.7B) with another step up to ~$2.0B in 2025, primarily driven by CCL/RCL,” he wrote. More to come from Wall Street? Investors now may be waiting to see if there will be more price target increases from analysts after the latest run up. Royal Caribbean, Carnival and Norwegian all have an average analyst rating of overweight, according to FactSet. But the stocks have bumped up and surpassed their average Wall Street price targets. Royal Caribbean has 3% downside to the average analyst price target of $92.77 as of Tuesday’s close, per Fact Set. Carnival has 21% downside to its average price target of $12.11 and Norwegian has 15% downside to its $16.60 average price target. — CNBC’s Michael Bloom contributed reporting.