Norwegian Cruise Line: An Opportunity For Alpha Generation

Summary

• Fears of the company's survivability are exaggerated. The company has raised additional capital, ensuring liquidity at least for the next 16 months.
• Demand for cruising remains well within historical ranges, indicating that the industry is well poised for a strong recovery.
• Investors should take up a small position (i.e., < 5%) to generate alpha for their portfolios.
• My analysis suggests that risk/reward is skewed toward the upside. We have a price target of US$35.54 within the next 12 to 24 months.

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The cruise industry has been battered by a myriad of negative news ever since the onset of COVID-19 and the overall sentiment for the industry remains poor. However, my analysis suggests that Norwegian Cruise Line (NYSE:NCLH) is severely undervalued with risk/reward severely skewed to the upside. I believe that investors are overly apprehensive as the cruising industry has made significant progress in terms of combating COVID-19 and its disastrous effects on operations and liquidity.

On a YTD basis, the S&P 500 is up 4.4% whereas the S&P 1500 Airlines Industry and S&P 500 Casino & Gaming Industry are down 42.86% and 17.02%, respectively. On the other hand, Norwegian Cruise Line is still down by 67.93% as uncertainty prevails for the cruising industry. However, I believe this represents an amazing opportunity for us investors to capitalize on.

Current Industry Situation

Currently, Carnival Corporation (CCL), Royal Caribbean (RCL), and Norwegian Cruise Line are suspended for sailing by the United States Centers for Disease Control and Prevention.

However, cruise operations in other parts of the world are already starting to resume services. In fact, the German TUI Cruises sailed in July 2020 with strict precautions and revised protocols. Additionally, two MSC Cruises will resume sailing in Europe. The MSC Grandiosa will take off on 16 August 2020 with ports including Genoa, Civitavecchia, and Naples whereas MSC Magnifica will take off on 29 August 2020, visiting the Eastern Mediterranean, Bari, Corfu, Katakolon, and Piraeus. That being said, have extended their reopening dates into 2021.

For Norwegian Cruise Line, CEO

Analyst’s Disclosure:I am/we are long NCLH. 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.