The price for Norwegian Cruise Line Holdings (NYSE:NCLH) dropped after the CDC issued new guidelines for cruise line companies that want to restart operations this summer. New voyages starting by mid-summer are unlikely for Norwegian Cruise Line Holdings, but here is why you should buy the stock anyway.
What’s new: CDC guidelines
The Centers for Disease Control and Prevention issued Phases 2B and 3 of the Conditional Sailing Order in the past week, outlining strict steps for a phased return to cruise operations. Cruise line companies looking to restart voyages this summer have been eagerly awaiting new CDC guidance.
The CDC’s phased return calls for simulated voyages during which cruise line companies have to prove that their health and safety protocols are sufficient to mitigate the risk of spreading COVID-19.
Once the CDC’s safety requirements for simulated voyages are fulfilled, a COVID-19 Conditional Sailing Certificate will be issued which allows cruise line companies to move to the second step of business normalization.
In the second step, cruise line companies move on to restricted passenger voyages which are required to have strict testing requirements.
The CDC will make inspections during both simulated and restricted passenger cruises and technical instructions require passengers to wear masks and socially distance.
This infographic from the CDC shows the successive steps that cruise line companies must follow in order to restart cruising by summer.
(Source: CDC)
Alternatively, passenger sailings can resume as long as 98% of crew members and 95% of passengers have received a COVID-19 vaccine.
Norwegian’s CEO has stated that the company will exceed this demand and insist on a 100% vaccination rate for passengers and crew, meaning everyone setting foot on a cruise ship will have to prove that they have been vaccinated.
Norwegian submitted plans to the CDC to restart sailings by summer and an earlier restart of operations could have been a catalyst for cruise line stocks.
Norwegian responded to updated CDC guidelines and warned that “a potential mid-summer restart from U.S. ports could be in jeopardy” because of the CDC’s updated requirements.
The CDC’s guideline, which is harder on the cruise line industry than for example on the hospitality industry, was not received very well by the market which drove cruise line stocks lower. The price of Norwegian Cruise Line Holdings dropped 7% on Thursday.
A cruise restart by summer is now unlikely… which is a setback for the cruise line industry and Norwegian Cruise Line Holdings, but only a temporary one that should not materially affect.
Norwegian’s financial results, booking update, valuation
Norwegian’s 1st quarter continued to show financial strain as the industry remained shut down and the cruise line company’s revenues dropped 99.8% Y/Y to just $3.1m.
Norwegian’s financial statements also showed a net loss of $1.4b compared to a loss of of $1.9b in the prior year. Revenues missed expectations, adding to selling pressure on Thursday.
(Source: Seeking Alpha)
A much better picture, however, was painted by Norwegian’s booking situation which continues to see accelerating strength and record bookings. Bookings this year are even better than in 2019 which was a peak year for the cruise line industry with a record number of passengers.
(Source: Norwegian Cruise Line Holdings)
Bookings are the most accurate predictor we have to estimate future revenues since the rest of Norwegian’s business is non-operational.
While the restart of cruises starting from US ports by summer is unlikely for Norwegian, by its own admission, FY 2022 revenue and earnings estimates should be largely unaffected by the CDC guideline… although I would have wished for a better outcome. The sooner the industry can get ready to set sail, the better.
Analysts expect $6b in revenues for Norwegian in FY 2022 and I am a little bit more optimistic about revenues because pent-up demand is extremely strong and is just waiting to be unleashed: I think $6.5b in revenues are possible for Norwegian in FY 2022 given positive pricing trends evident in Norwegian’s new booking update, assuming a full return to business.
Thursday’s price drop below $30 has lowered Norwegian’s FY 2022 P-S ratio from 1.8x to 1.7x and valuations across the cruise line sector retreated.
These are the P-S ratios for NCLH and rivals before the new CDC guideline was announced.
Market Cap | FY 2022 Est. Revenues | P-S ratio before CDC guideline | |
NCLH | $10.9 | $6.0 | 1.8 |
(CCL) | $30.2 | $18.2 | 1.7 |
(RCL) | $21.3 | $9.9 | 2.2 |
Average | $20.8 | $11.4 | 1.9 |
(Source: Author)
And these are the P-S ratios and lowered market caps for NCLH and rivals after the new CDC guideline was announced.
Market Cap | FY 2022 Est. Revenues | P-S ratio after CDC guideline | |
NCLH | $10.3 | $6.0 | 1.7 |
CCL | $28.9 | $18.2 | 1.6 |
RCL | $21.0 | $9.9 | 2.1 |
Average | $20.1 | $11.4 | 1.8 |
(Source: Author)
Norwegian’s average P-S ratio in the five-year period preceding COVID-19 was 2.3x and if I calculate the NCLH P-S ratio based on my best-case FY 2022 sales estimate of $6.5b, I get an even lower P-S ratio of 1.6x.
Risks
A further delay of voyages is the biggest short-term risk factor for the cruise line industry in general and especially for Norwegian because the cruise line company has the highest debt-to-equity ratio in the sector.
Norwegian had a monthly average cash burn of $190m in the 1st quarter 2021, so every month that ships aren’t sailing costs the company a large amount of money.
Norwegian’s balance sheet showed $3.5b in cash last quarter, creating 18 months of liquidity runway. If after 18 months ocean cruises aren’t sailing regularly again, then it is time to worry, not now.
Closing thoughts
Norwegian's management has stated that it requires a 100% vaccination rate for passengers and crew to resume voyages as soon as possible, which will likely be this fall.
First quarter bookings were strong again and indicate a fast return of cruise passengers.
FY 2022 revenues and earnings should not be materially affected by the new CDC guideline and Norwegian has more than enough liquidity, despite a high monthly cash burn, to prepare for a return to business in the fall.
The price drop for Norwegian is more of a buying opportunity than a reason to worry about the cruise line company’s return to business.
