Viking Holdings has earned a ‘Buy’ rating in initial coverage from analysts at Bank of America (BofA) and UBS who are bullish on the cruise operator’s luxury focus.
The cruise company, which operates voyages across the river, ocean and expeditionary segments, debuted on the New York Stock Exchange earlier this month at about $26 per share and traded hands at about $31 on Tuesday afternoon.
Both BofA and UBS analysts see the stock reaching $35.
“Viking is a pure play in luxury travel with a strong balance sheet and a high return on invested capital, both of which are significant factors in an industry that is much more capital intensive than hotel c-corporations,” the UBS analysts wrote in a note.
Viking’s river cruise mix helps drive an above-peer return on invested capital, they noted. Viking’s return on invested capital was 27.5% compared to 5.5% to 12.1% for other public cruise lines in 2023.
“The most significant factor in Viking’s higher returns is that Viking is close to 60% river cruising rather than ocean cruising, and the cost to build a rivership on a per berth basis is less than half of the cost to build a luxury ocean ship, yet ticket price is roughly the same for both of Viking’s business segments,” they wrote.
This is expected to continue even as Viking grows its ocean capacity by a 12% compound annual growth rate over the next five years and its river business by 4% as its business mix shifts more to ocean.
“We note that Viking grew its return on invested capital in 2019, even while expanding in the ocean segment that it entered in 2015, so the growth in scale has benefited return on invested capital more than the mix shift has hurt it, and we expect that to continue,” the analysts wrote.
They also believe Viking has “scarcity value” for investors looking to invest in the luxury consumer, specifically consumers of luxury experiences rather than luxury goods.
However, the analysts noted that on the flip side of its luxury focus is that luxury cruising makes up just 5% of the broader travel market.
“Luxury cruising also has greater geopolitical risk versus the broader cruise market that is more Caribbean-focused,” they added.
The BofA analysts also noted several key risks to Viking, in addition to the geopolitical risks present for any cruise or leisure travel company.
The first is that its 9.4% compound annual growth rate over the next three years comes with high capital expenditures of nearly $3 billion over that time period.
Additionally, Viking’s expansion into the ocean cruise market comes with high levels of competition from established players like Carnival Cruises and Royal Caribbean, and its business has more seasonability than its peers as green river operations are largely shut down in the winter months.
They added that Viking has “no casinos, no kids but a singular brand a clear niche.” “Unlike cruise peers, with a portfolio of brands for many demographics, Viking has a single brand with uniformity across its fleet, with recognizable offerings to its target market: affluent North American travelers ages 55 plus,” they wrote.
“Viking generates superior returns and unit economics and, in our view, is well-positioned in the industry given its growth profile, customer segment, and balance sheet.”
They added that Viking’s average itinerary is booked 11 months ahead, providing meaningful visibility. For 2024 and 2025, Viking has already sold 89% and 34% of its inventory respectively, they noted.
“These attributes allow Viking to generate better financial metrics and net leverage than cruise line peers while growing at a faster rate than the industry,” they wrote.