Despite a sluggish U.S. economy, Carnival Cruise Lines (NYSE:CCL) appears poised to punch right through its 52-week high thanks to a recent ratings upgrade it received from Felicia Hendrix, an analyst with Lehman Brothers.

The upgrade (from 'equal-weight' to 'overweight') comes at a terrific time given that there are a number of potential catalysts on the horizon. (For more on stock ratings, see Analyst Recommendations: Do Sell Ratings Even Exist?)

The Island Advantage
Now, I'm going to sound like a bit of a commercial for the next few lines, but trust me there is a reason (no, it's not because I work for the company).

Having traveled extensively to the Caribbean, I can tell you that Carnival's cruises to the region are excellent. Fruity drinks and reggae music aside, in my opinion the routes and the ports of call the company offers are second to none.

To me, their cruises are more thorough and seem to have less down days (or "fun days" in cruise lingo) at sea. The company also has terrific connections when it comes to local tours, and it's able to secure good prices for those excursions. Moreover, the prices the company charges for Eastern, Western, and Southern Caribbean cruises are extremely competitive.

Ok, commercial time is over. The reason I had to detail my experience with Carnival is that these are serious advantages in my mind. I think travel to the Caribbean will perk up in light of the declining value of the dollar and the desire of many Americans to vacation close to home. Going forward, given the company's dominance in this region, I suspect that things will only get better. (For related reading, see Competitive Advantage Counts.)

Cruising Europe

As mentioned above, the strength of the U.S. dollar is a concern. However, it is important to note that the U.S. dollar's relative weakness to the euro doesn't mean that people aren't going to travel to the region. In fact, there are a number of advantages to cruising Europe right now rather than taking to the airways or the rails.

For Europeans, it's a great way to see a number of cities on one holiday, again without having to spend an inordinate amount of time moving from train to train or airport to airport. And for Americans, cruising Europe is attractive because it's probably the cheapest way for someone to travel to the continent. Your room, entertainment, and excursion options are largely available in U.S. dollars rather than euros.

What About Earnings?
At present, Wall Street analysts are expecting the company to earn $2.94 per share this year and $3.26 per share in 2008. However, due to its ongoing share repurchases and booking trends, I suspect that the firm's 2007 estimate could be low by about two to three cents. It's too early to tell for 2008, but my initial impression is those numbers could be light as well - perhaps by a nickel or more.

The Bottom Line
I think the Lehman's upgrade comes at a good time as I still see substantial upside potential for both Carnival and its stock. I wouldn't be surprised to see this stock trading in the $60 range within a year.

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