Morgan Stanley Sinks Carnival Shares

Morgan Stanley Sinks Carnival Shares

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Share of Carnival sank 5% today after Morgan Stanley downgraded the cruise line operator from equal-weight to underweight.

So what: Along with the downgrade, Morgan analysts reiterated their price target on the stock of $32 per share, representing about 7% worth of downside to yesterday's close. Carnival posted market-topping third-quarter earnings yesterday, but weak forward guidance implying a sluggish yield recovery and cost increases prompted Morgan to make the call on valuation concerns.

Now what: Morgan now expects Carnival to earn $1.60 per share in 2014, representing a 28% cut to its previous view. "Once again, investors need to look at least two years out to make the shares look cheap, assume a perfect recovery, and that there are no 'structural' issues causing the ongoing downgrades," wrote Morgan analysts in a note to clients. Of course, when you consider Carnival's still-massive debt load, the risk/reward trade-off looks even less appetizing.

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