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Royal Caribbean (RCL)

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Royal Caribbean (RCL), following the recent sinking of its peer cruise ship, we are cautious about the sector in the near term. This disaster shook the cruisers' confidence, thereby sharply reducing the booking volume.

Additionally, the probable cannibalization of the existing fleet, lower visibility on a new class of ships that the company is designing and the expected increase in cost structure make us cautious. Hence, we downgrade the stock from Neutral to Underperform.

Our six-month target price of $28.00 per share equates to about 13.7x our estimate for 2012. The target price implies an expected negative return of 8.7% over that period. Therefore, we recommend an Underperform rating on the shares.

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