Can Norwegian Cruise Line Stock Recover After A 70% Drop?

by Trefis Team
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Norwegian Cruise Line Holdings (NYSE:NCLH) has taken a hammering as the Covid-19 pandemic spread. As customers cancel their bookings and demand refunds, Norwegian, much like other cruise liners, is facing a huge cash outflow which has fueled a massive 70%+ drop in stock price since the beginning of the year. That’s terrible for anyone who owned the stock before the slide began. But can the stock recover anywhere close to its year-beginning levels? That would be a huge return for anyone investing now! For it to happen, the demand shock must completely fade and pre-pandemic growth trajectory must resume, which could take well over a year. But that’s not all. Cruise line business has a high fixed cost component. As Norwegian continues to incur costs related to payroll, lease, ports, and repair and maintenance, the question that everyone is asking – does it even have enough liquidity to survive while demand recovers? We think that in a pessimistic scenario, the company will generate a net loss of -$380+  million, but can survive from a liquidity stand point if it can cut its capital expenditures down to $500 million (70% lower than 2019 capex). Our dashboard Does Norwegian Cruise Line Holdings Have Enough Liquidity To Survive Covid-19 Demand Shock examines the company’s cash flow generation ability and financing requirements in two different demand recovery scenarios. 

Does Norwegian Have Enough Steam To Survive If Covid-19 Demand Shock Recovers By Q3/Q4

Consider a scenario where the demand shock experienced by the travel and hospitality industry completely fades away by Q3/Q4 of this year. In this scenario, we assume a revenue decline of 30%, and a 50% cut in capital expenditures for full year 2020. We also assume that Norwegian will not repurchase any shares, and stay consistent with its dividend policy in 2019 when it distributed no dividends. The good news – Norwegian can generate annual profit of ~ $150 million in this scenario, and stay cash flow positive at $200 mil+ provided it caps its capital expenditure at ~ $800 million (down 50% from a year ago).

But What If The Above Recovery Is Incomplete Because Of Discretionary Spending Pullback?

Even if by Q3/Q4 there is complete control over the pandemic, there is a good chance that consumers will pull back their discretionary spending in wake of an uncertain economic environment. This is especially more relevant for retired individuals who need to manage their savings prudently. Interestingly, individuals over 60 years of age account for over 30% of cruise line customers, making it a critical customer segment. Additionally, the fear that big cruise ships can be perfect places for the spread of infection considering the large number of customers in close quarters using a host of common services, the vulnerable elderly may postpone their cruise plans indefinitely. In this scenario, we assume a 50% decline in revenue and calculate that while full year losses may amount to -$380 million, Norwegian can stay cash flow neutral (no cash inflow or outflow) provided it can cap its capital expenditures at ~ $500 million (down 70% from a year ago).

Extreme Case: What If The Demand Uptick Does Not Happen At All? 

Norwegian is burning nearly $110 – $150 million in cash every month to cover its fixed costs. Add to that a looming $450 million in customer refunds, and things are not looking rosy. While our scenario analysis suggests that Norwegian can use capex as a lever to control liquidity, check out how much operational runway it has if demand remains zero or how much revenue it needs to lose before it breaks even

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