Time To Buy Norwegian Cruise Line Stock?

by Trefis Team
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The shares of Norwegian Cruise Line (NYSE: NCLH) have more than doubled from the lows observed in March 2020 supported by the ongoing vaccination and expectations of broader economic recovery by late 2021. However, NCLH stock remains 54% below the level observed in December 2020 despite the company highlighting that cruise bookings for the second half of 2021 fall within historical ranges. Also, the company incurred just $2 billion of operating cash outflow for the first nine months of 2020 – indicating room for more growth for the stock as the $8 billion drop in market capitalization since December 2020 looks unwarranted. Trefis highlights the historical trends in the company’s revenues, earnings, and valuation multiple in an interactive dashboard analysis Why Norwegian Cruise Line Has Lost 50% Between 2017-End And Now?

The company had strong financial & operational metrics before the pandemic

Norwegian’s revenues observed 20% growth from $5.4 billion in 2017 to $6.5 billion in 2019, supported by rising capacity and ticket prices. The net margins remained relatively flat assisting 22% growth in earnings. Interestingly, the passenger cruise days and capacity days increased by 11.5% since 2017 while the occupancy rate remained stable at 107% – indicating strong cruise demand. (Capacity days represent the product of available berths and the number of cruise days for a period. Passenger cruise days is the product of the number of passengers and the number of days in their respective cruises.)

After the expiration of the No Sail Order in October 2020, the CDC issued a Framework for Conditional Sailing Order highlighting key measures to mitigate the risk of Covid-19 transmission among passengers, crew members, and communities ashore. To meet the requirements, Norwegian Cruise Line has suspended global cruise voyages through May 31, 2021. However, the company highlighted in Q3 2020 that cruise bookings for the second half of 2021 fall within historical ranges – indicating the likelihood of a strong uptick in stock price by fall.

P/S multiple stands at multi-year lows

NCLH stock declined from levels of around $52 in February 2020 (pre-crisis peak) to levels of around $10 in March 2020 (as the markets bottomed out), implying NCLH stock lost 81% from its approximate pre-crisis peak. With the easing of restriction measures, the stock has more than doubled to $27, but has a hidden growth opportunity given the multi-year low P/S multiple.

NCLH’s P/S multiple changed from 2.3 in 2017 to 1.9 in 2019. While the company’s P/S is now 0.9 there is an upside when the current P/S is compared to levels seen in the past years.

As the slump in travel demand continues to weigh on the hospitality sector, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Expeditors International vs. LGI Homes shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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