Norwegian Cruise Line (NYSE:NCLH) has seen its share price languish this year amid a strong year for equities in general, and one that has produced new all-time highs in the major indices. This can be owed to the inherent cyclicality of Norwegian's business, as vacations are just about the most discretionary purchase one can make. This leads to fears near the end of the economic cycle that the companies selling those discretionary purchases will suffer, but no such evidence has emerged just yet. As a result, I think Norwegian is at least worth a look for longs.
Norwegian has a total of 27 ships in service with about 58,000 berths, so it is of considerable size, but definitely not the largest cruise operator. It operates three brands - Norwegian, Oceania, and Regent Seven Seas - to more than 450 destinations worldwide. In addition, Norwegian will introduce 10 additional ships through 2027.
Growth has been absolutely spectacular since the company came public in 2013, and since its first full year as a public company in 2014, its earnings per share have grown from $1.62 to an estimated $5.07 this year. That sort of growth is difficult to come by in any industry, but Norwegian has proven it can grow not only by increasing its capacity but via organic growth as well. This has led to huge gains in earnings, but the stock is only marginally higher today than it was five years ago. The reason? Valuation. More on that in a bit.
But, first, I'd like to walk through what Norwegian has been able to accomplish in 2019 at a time when investors thought we'd already have seen the top of the cycle for cruise lines. It simply hasn't worked out that way and if guidance is to be believed, it won't be in 2020 either.
Third quarter earnings came out recently, and there was a lot of good news packed in. The company was able to beat expectations on revenue and earnings as the market has been too pessimistic this year. Revenue rose 3% against the year-ago period to $1.9 billion. Capacity days fell by 1.8% but that was no matter; continued strength in pricing, and onboard spending was more than enough to offset it. Gross yield rose an impressive 4.8% in Q3, while net yield increased 3.9% on a forex-neutral basis.
The one thorn in the side of Norwegian has been operating expenses, which rose 6.7% in Q3, primarily due to the redeployment of Norwegian Joy and promotional costs. Gross cruise costs per capacity day rose 8.9%, but excluding fuel costs, soared 11% on a constant currency basis. Fuel prices rose quite significantly last year, but those pricing increases have leveled out in 2019, so fuel cost per ton was roughly flat in this year's Q3.
While the quarter wasn't perfect, analysts expected worse on the top and bottom lines, with EPS coming in at $2.23 on an adjusted basis in Q3, down slightly from the $2.27 it produced in last year's Q3. Norwegian suffered in Q3 due to the impacts of Hurricane Dorian, which forced itinerary modifications and cancellations, among other things. However, on the whole, I think the company is continuing to perform very well, with the caveat that operating expenses need to be reined in.
Very importantly, management sees bookings for next year ahead of this year's records for volume and pricing, which is somewhat amazing considering how late we are in the economic cycle, and given the chorus of negative sentiment on the cruise sector in general. This is particularly true in light of the very cheap valuations seen around the sector, with Norwegian included.
Even with the recent rally, shares trade today at just 10.7 times this year's earnings estimates of just over $5. That's cheap by any measure, but in particular, when you consider how Norwegian has been valued in the past, in addition to its robust growth outlook.
Norwegian's valuation was sky-high just after the IPO in 2013/2014, as is usually the case after a company issues public shares for the first time. However, even after that period, valuations were in the mid-teens. Last year, Norwegian was valued generally in the 10 to 11 times earnings area, where it is today. However, that pessimism has been misplaced.
Just have a look at the growth analysts are expecting in the coming years; does this look like a company that is struggling and should have its valuation reduced? It doesn't to me.
Source: Seeking Alpha
After $5.07 this year, Norwegian should see $5.58 next year and well over $7 per share in 2023. This all seems very reasonable considering Norwegian continues to see very strong booking volumes, setting records seemingly all the time, its pricing is robust, onboard spending continues to rise, and the company is buying back stock. All of these things combined mean that Norwegian's revenue should rise, the share count will be reduced, and margins should at least be maintained, pending what happens with operating expenses. Even if operating expenses continue to rise, however, Norwegian should be in good shape with its robust revenue generation and reduced share count.
Obviously, there are risks, but I'd argue they are no different today than they would be at any other time. Recessions are a huge deal for cruise operators for obvious reasons, but there is absolutely no evidence of one showing up in the near future. The company's own booking volume and pricing tell us there is no recession in cruises coming next year as people continue to spend more and more. Continuing to worry about a slowdown in bookings for seemingly no reason doesn't make a lot of sense to me. Let's instead take a radical approach and maybe wait for some actual evidence before getting all bent out of shape.
What you get with Norwegian is a company with lots of new capacity coming, very strong booking activity, a share repurchase program that can meaningfully reduce the float, and world class cruise brands. For under 11 times earnings, what more can you ask for? I think Norwegian is already pricing in the risk of recession despite there being no evidence of such an event, and as such, I find it to be extremely attractively priced. I think there is not only upside to earnings in the coming years, but the valuation as well. Given this, I think Norwegian is a buy.
This article was written by
I've been covering financial markets for ten years, using a combination of technical and fundamental analysis to identify potential winners (and losers) early, particularly when it comes to growth stocks.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.