Broker tips: Carnival, Rio Tinto, Rolls Royce

Analysts at Berenberg reiterated their 'sell' stance on shares of Carnival, telling clients that although valuation might look "depressed", macro "weakness" could see earnings in the sector drop by between 24.0% and 74.0%.

And given the low interest rate environment - which they expected to be a constant - Carnival was most exposed, despite its lower leverage.

Hence, analysts Stuart Gordon, Annabel Hay-Jahans and Jack Cummings reiterated their 'sell' recommendation for shares of Carnival (target price: 3,100.0p), while keeping Norwegian Cruise Lines (target price: $60.0 down from $65.0) and Royal Carribean Cruises at 'buy' (target price: $125.0 from $138.0).

Over the preceding 20 years, cruise and travel operators shares had sported a valuation, on a price-to-earnings basis similiar to that of the wider market, but in the later stages of the economic cycle they had traded at a roughly 25% discount - as was now the case.

However, they added that: "given the magnitude of the earnings risk, we are much less optimistic on this being reflected in current valuations."

Furthermore, after conduction a ship by ship analysis of operators' fleets, they concluded that returns were best protected at Norwegian Cruise Lines

To back up its case, Berenberg specifically referenced recent weakness in the US Home Retail Furniture Index, which had begun to follow a path similar to that seen in previous economc cycles, after having proved a good predictor over the prior two cycles.

"Combined with what we have interpreted as more conservative language from the operators, we are incrementally more negative," the broker's analysts said.

"While consumer data remains supportive, it has softened across all the major cruise markets . While we are not attempting to predict any macro malaise, we are incrementally more concerned as we move into 2020."

Analysts at JP Morgan reiterated their 'overweight' stance on shares of Rio Tinto following the miner's 2019 Strategy Day.

The investment bank highlighted the diversified miner's "world-class" assets and attractive valuation, pointing out that the shares were chaning hands on free cash flow yields of 8.0-10.0% and sporting a dividend yield of 7.0-9.0%.

Nevertheless, they judged there to be no susbtantial price sensitive disclosures.

For their part, analysts at Deutsche Bank "trimmed" their 2020-22 forecasts for the company on the back of lower iron ore volumes and voiced "surprise" at the fact that Rio's management had not said more about its "struggling" Pacific Aluminium business or regarding its longer-term growth options beyond iron ore.

There were also no new free cash flow targets beyond the $1.0-1.5bn penciled-in for 2021.

Deutsche Bank also noted how management had no plans to provide a productivity target going forward.

The German broker was at 'hold' on Rio with a target price of 4,400.0p for its shares.

Analysts at Morgan Stanley marked down their target price on shares of UK aerospace manufacturer Rolls Royce, but told clients to look past the temporary costs related to the Trent 1000 programme and that their fundamental value was "compelling", even if sentiment was at a low ebb.

Since June, the manufacturer had apparently downgraded its guidance for the company's underlying free cash flow, stoking concerns around the company's underlying performance.

Morgan Stanley believed those downgrades were related to the Trent 1000 engines and now expected the higher costs incurred to be sustained for longer.

Nonetheless, they explained that: "if management can ringfence these additional challenges in the next 12-24 months,and address investor concerns on mid-term targets, we think FY19 results on 28th February could be a watershed for the shares."

Their forecast was for all mechanical issues around the Trent 1000 mechanical issues to be adressed by 2021.

They also pointed out how the shares had barely flinched after Boeing reduced its monthly production forecast for the Dreamliner, which for them "tells us the market is already pricing in a bearish view on widebody".

On the back of their lower forecasts for for free cash flow in 2020 and 2021, which they cut by 15.0-20.0% to reflect the higher Trent 1000 costs, they revised their target price for the stock from 1,100p to 950.0pm but stayed at 'overweight'.