Norwegian: 2023 Is The Inflection Year
Summary
- Norwegian provided mixed preliminary Q4'22 numbers.
- The cruise line sector appears poised to follow the airline rebound of 2022 by about 1 year.
- The stock is cheap with strong earnings power and travel sector indications of the ability of the cruise line to recapture the $5 EPS level of 2019.
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Tatiana Dyuvbanova
Norwegian Cruise Line Holdings (NYSE:NCLH) reported preliminary numbers for the 2H of last year and 2022 couldn't end fast enough. The covid restrictions in place during most of 2022 greatly impacted results, but the cruise line is poised for a major inflection in 2023 due to passengers having plenty of time to plan and book trips in the year ahead. My investment thesis remains ultra Bullish on the cruise line stock trading at a discount to future earnings power.
Source: FinViz
Preliminary Numbers
Norwegian was forecast to report improving results for Q4, but the cruise line wasn't forecast to make a huge rebound. The typical cruise traveler isn't signing up last minute for weeklong trips unlike some of the airline travel in the business segment.
The cruise line reported the following preliminary numbers:
- 2022 revenues of $4.7 to $5.0 billion.
- 2H'22 EBITDA nearly-breakeven.
- Year-end cash balance of $1 billion.
- Q4 occupancy rate of 87%.
- 2023 booked position at ~62% for full year at higher prices than 2019.
In general, Norwegian didn't provide investors with a ton of financial details and the results for Q4'22 aren't very meaningful to shareholders. Analysts forecast revenues for 2022 of $4.82 billion and the guidance from management appears right inline with the target.
The adjusted EBITDA estimate is slightly below where the company had guided the market to slightly positive results for the 2H. Norwegian made the slightly positive EBITDA forecast along with the Q3'22 earnings report only in early November, so investors have to be careful to not over extrapolate on typically soft Q4 numbers anyway.
Follow The Airline Example
Analysts have Norwegian earning $1.13 this year and a much higher $1.86 in 2024. With the airlines providing massive upside guidance for Q4 and 2023, investors should be able to take some of this playbook for the cruise lines in 2023, approximately one year behind the airlines.
United Airlines (UAL) just reported a Q4 where the airline earned $2.46 per share. The company lost $1.60 per share in the prior Q4 as the globe was reopening in late 2021, but covid fears due to Omicron led to a weak quarter.
The airline now forecasts an $11 EPS in 2023 in a sign of how Norwegian will start generating profits in the Spring leading to booming numbers in the Summer and going forward. The airlines never completely shutdown, but United was still running at close to 80% of the 2019 capacity levels in late 2021 and early 2022.
Norwegian just reported a quarter with 87% occupancy in a sign the cruise line is already ahead of the airline playbook starting last year. The quarterly earnings estimates for the cruise line generally follow this same trend with the forecast for another loss in the current March quarter followed by a big $0.35 EPS in the June quarter. After that, the cruise line is full speed ahead to strong profits going forward.
Source: Seeking Alpha
The same story occurred with American Airlines (AAL) where despite higher outstanding shares and debt, the airline was still able to post a quarter with an EPS matching 2019 levels. While the airlines make the case for even higher revenue considering the reduction from GDP levels with United Airlines reporting the 2022 domestic air travel spending was only 0.49% of GDP while the prior decade averaged 0.54%. The cruise lines make the case that cruising was already under penetrated as a travel option with only 1% of the world taking a cruise in 2019.
Source: Norwegian Q3'22 presentation 
For these reasons, the cruise lines should be able to grow capacity to match the additional ships being built. Norwegian still forecasts capacity to grow ~50% from 2019 levels by 2027. The cruise line will add 3 ships this year to bring total ships to 32 with this additional capacity absorbed through 2024 before adding 2 more ships in both 2025 and 2026.
Norwegian entered the covid crisis in a far better net debt position than American Airlines, but the cruise line now finds the business with a relatively higher debt level compared to perceived weak airline. Both travel companies saw net debt levels soar from the end of 2019 levels while Norwegian has seen the levels expand far more in the last year due to ongoing losses while America Airlines has started generating massive profits.
Takeaway
The key investor takeaway is that the cruise lines are poised for a rebound in 2023 to match the recent surging profits by legacy airlines. While the cruise lines and airlines have slightly different business dynamics, one shouldn't doubt the ability of Norwegian to eventually top the $5.09 EPS earned in 2019 similar to forecasts from peers in both sectors already. Under this scenario, Norwegian is very cheap at only $15.
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This article was written by
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in NCLH over 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.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.