On paper, Norwegian Cruise Line (NYSE:NCLH) doesn’t exactly convey confidence. With the consumer economy facing various headwinds – predominantly stubbornly-high inflation – people could easily cut back on travel expenses. However, Norwegian can still sail to upside despite economic vagaries thanks largely to robust demand. Therefore, I am cautiously bullish on NCLH stock.
NCLH Stock Benefits from Rising Industry Interest
At the start of the COVID-19 pandemic, few vacationers wanted anything to do with cruise ships. Indeed, the industry represented the poster child of what could disastrously go wrong due to the public health crisis. However, following fading fears and reduced restrictions, consumers can’t get enough of the value-for-dollar proposition of cruises. Better yet, the sector continues to attract intense interest, bolstering NCLH stock.
While shares have come off conspicuously from their highs this year, Norwegian Cruise overall represents a standout winner. Since the start of the year, NCLH stock shot up nearly 39%, beating out the benchmark S&P 500 Index (SPX), which is up over 12%, handily during the same period. As well, NCLH beat out the innovation-centric Nasdaq Composite Index (NDX), which gained a bit over 27%.
Fundamentally, cruise ship itineraries offer tremendous value for the money. With everything produced at scale – from the tours to entertainment to the menu items – this collective action keeps prices low. Therefore, companies like Norwegian feed the revenge travel sentiment (which sparked due to the mass cabin fever effect) but at a low cost.
Such a business model is especially relevant at the present juncture. Though the Federal Reserve has made progress in its efforts to induce disinflation, consumer prices remain too high. Therefore, it’s not inconceivable that the central bank may raise rates, applying downside pressure on the economy.
In perhaps any other context, that might hurt NCLH stock. Still, COVID imposed a unique economic disruption in that it temporarily halted social mobility. Therefore, the desire to travel still remains acutely strong, favoring the cruise ship industry.
NCLH Appears to be an Undervalued Stock
To be fair, Norwegian’s competitors may seem like a superior proposition based on their financial and/or market performances. For NCLH stock, it dipped more than 25% since July 31 (before its most recent earnings report). Unfortunately, a disappointing outlook eroded its equity value. Still, with the red ink, NCLH appears to be an undervalued stock.
As TipRanks reporter Vince Condarcuri pointed out, on August 1, NCLH stock tanked by over 14%. Although Norwegian’s second-quarter earnings report surpassed expectations, the company’s guidance missed analysts’ consensus targets. Specifically, management revealed that it expects adjusted earnings per share to hit an expected 70 cents in Q3. However, this fell short of the consensus of 79 cents.
In all fairness, it’s not unreasonable for investors to have doubts. After all, inflation and mass layoffs impose significant challenges to consumer sentiment. Nevertheless, for the intrepid investor, NCLH stock now trades at 11.4x forward earnings. That’s lower than the forward price/earnings ratio of Carnival (NYSE:CCL) at 13.9x. Also, it’s lower than the sector median forward PE of 14x.
Also, NCLH stock trades at only 0.97x trailing-12-month sales. In contrast, Royal Caribbean (NYSE:RCL) trades at a much loftier 1.97x revenue. Therefore, the recent volatility in NCLH stock offers a relative discount to the competition.
Further, prevailing indicators suggest that demand will continue to be robust for cruises. Therefore, cruise operators are in an enviable position to hike prices in part due to rising consumer interest. With NCLH stock being an undervalued downwind beneficiary, speculators should consider putting the idea on their radars.
The Smart Money Gives Their Approval
Finally, for those folks still on the fence about Norwegian, it may help to know that options traders appear to be favoring the bullish thesis. Specifically, options flow data – which screens exclusively for big block trades likely made by institutions – showcases positive support for NCLH stock.
Notably, on September 19, a major trader (or traders) bought 1,003 contracts of the Jan 19 ’24 15.00 call, paying a $325,000 premium in the process. This premium represents over 10 standard deviations above the mean, according to Fintel. Thus, it appears to be a high-confidence move.
Is NCLH Stock a Buy, According to Analysts?
Turning to Wall Street, NCLH stock has a Hold consensus rating based on four Buys, eight Holds, and one Sell rating. The average NCLH stock price target is $20.88, implying 26.9% upside potential.
The Takeaway: NCLH Stock Offers Decent Value for Speculators
While the cruise ship industry presents high risks because of the troubles impacting the consumer economy, revenge travel sentiment still remains strong. Further, companies like Norwegian feed this demand at a relatively low price. Even better, NCLH stock appears undervalued compared to the competition, and a recent large buy in the options market adds to the bull case, making it a worthwhile (but speculative) idea.
