Norwegian & Royal Caribbean Down 80%. Is Either Now A Good Value?

The Coronavirus crisis has badly impacted the cruise industry. Cruise operators have had to cancel their itineraries and it looks unlikely that ships will sail for the foreseeable future, as the pandemic continues to spread, particularly in Europe and the U.S, which are the largest markets for cruises. Norwegian Cruise Line (NYSE: NCLH) and Royal Caribbean (NYSE: RCL), two of the major cruise companies, have seen their stock prices drop by -82% and -78% respectively since early February 2020, after the WHO declared a global health emergency relating to the Coronavirus.

Our analysis Is Norwegian Cruise Line Stock A Better Bet Than Royal Caribbean After 80% Drop? compares the stock price performance and fundamentals of the two companies over the last few years. Parts of the analysis are summarized below.

Over the last few years, the fundamental performance of the two companies has been somewhat similar. While Norwegian posted higher revenue growth between 2014 and 2019 (16% CAGR vs. 6% CAGR for Royal Caribbean) driven by acquisitions, EPS growth has been similar at about ~21% CAGR for both companies. Norwegian’s P/E multiple based on 2019 earnings has declined from 13.5x in 2019 to 2x currently, while Royal Caribbean’s multiple has declined from 14.7x to about 2.7x, implying that the risks are being priced-in.

Outlook Still Remains Uncertain

While the valuations do appear low on a historical basis, the outlook for both companies remains tough. It’s still unclear when the health crisis will abate and when cruiseliners can resume operations. Moreover, there’s a real possibility that customer interest in cruises could diminish following this crisis, considering that certain cruise ships such as Carnival’s Diamond Princess have been hotspots for the virus. The relatively high leverage of the two companies could also be an issue. Norwegian has about $7 billion in total debt (D/E ratio of about 0.9x) as of December 2019, compared to about $11 billion for Royal Caribbean (D/E  ratio of 0.74x) and they may have to fend for themselves, as cruise companies are unlikely to be part of the major economic-recovery bill signed by President Donald Trump, as they are not incorporated in America.

HISTORICAL PERFORMANCE: From 2013-2019 Royal Caribbean Cruises stock price grew at 3x the rate of Norwegian Cruise Line Holdings Ltd stock

• Norwegian Cruise Line stock went from $35 in 2013, the year it was listed, to $58 at the end of 2019, representing a change of 66%.
• During the same time period, the Royal Caribbean Cruises went from $42 to $132.20 representing a change of 210%.
• This implies that Royal Caribbean Cruises stock grew at ~3x the rate of Norwegian Cruise Line Holdings. The difference in growth was due to stronger earnings growth for RCL in the years following the 2008-09 financial crisis, although Norwegian posted stronger levels of growth since 2015.

ANALYSIS: Fundamental performance over the last 5 years and valuation

P/E Ratio:

• Based on trailing 2019 P/E ratios, Norwegian stock looks attractive compared to prior years and attractive compared to Royal Caribbean Cruises.
• Norwegian Cruise Line Holdings Ltd’s 2019 trailing P/E ratio of 13.5 is 0.9x that of the 2019 Royal Caribbean Cruises P/E ratio of 14.7x.

Historical Revenue Growth:

• Norwegian Cruise Line Holdings Ltd 2014-19 annualized revenue growth of 16% is 2.7x that of RCL’s 6% annualized revenue growth. This was largely due to acquisitions.

Historical EPS Growth:

• Norwegian Cruise Line Holdings Ltd 2014-19 annualized EPS growth of 21.5% is roughly in line with RCL’s EPS growth of 21.1%

Total Debt Comparisons

• Norwegian Cruise Line Holdings Ltd Total Debt has increased from $6.4 billion to $6.8 billion between 2016 and 2019. In comparison, Total Debt for Royal Caribbean Cruises has risen from $9.4 billion to $11 billion in the same period.

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