Norwegian Cruise Line Holdings, Ltd. (NCLH) operates as a cruise company in North America, Europe, the Asia-Pacific, and internationally. Among its businesses are the Norwegian Cruise Line, Oceania Cruises, and Regent Seven Seas Cruises brands. It offers itineraries ranging from three days to a 180-day cruise, calling on various locations.
I am bearish on NCLH stock.
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The Pandemic Storm of the Century
For the cruise industry, COVID-19 created the perfect storm.
Many cruises were in progress when COVID-19 first came to the fore as a pandemic. From the outset, many people became ill due to outbreaks aboard ships. Moreover, some ships were stuck out at sea for weeks as ports denied them entry, and elsewhere, passengers were stranded in foreign lands.
Consequently, with no advance warning, a shutdown of the entire industry was enforced.
Moreover, social distancing is not a plausible solution for cruise ships. While restaurants, theaters, and theme parks can at least re-open at 50% capacity, it’s next to impossible to socially distance on a cruise line.
Exacerbating the situation, cruise lines did not receive bailout money, while airlines and many other businesses in the United States collected billions. Cruise lines like Norwegian missed out, as they are domiciled outside of the United States for tax purposes.
While there was some discussion of a bailout, there was little appetite to reward companies who evade U.S. taxes while receiving payment from U.S. taxpayer money. Looking to the future, when the debt load becomes too big of an anchor, there will likely not be government help coming.
Financial Woes Are Long-term
As mentioned above, once cruises were shut down globally, revenues fell off a cliff. NCLH was able to reach $1.28B in fiscal 2020 due to a strong Q1, however this is an 80% decline from 2019. For the 12 months ending June 30, 2021 the company only made $23 million in top-line revenue. For fiscal 2020 the company lost more than $4B. The company as been losing over $600M each quarter in 2021. This has led to the need to devalue shareholders.
In order to continue operating, the company needed to use both debt and equity financing. At December 31, 2021 NCLH had a $6.8B long-term debt load. Not great considering the $252M cash balance and $730M in total current assets, however not an imminent danger. Fast forward to June 30, 2021 and the debt load now stands above $12B – an 80% increase. Considering that the company made $930M in net income in 2019, this is very concerning.
Further, shares have also been devalued by massive dilution. Diluted average shares outstanding have gone from 214M at December 31, 2019 to over 369M at June 30, 2021. This is a 72% increase in diluted shares over 18 months of time. Worse, the company will not be able to conduct buybacks, with the massive debt load needing to be serviced. It could be well over a decade before this would even be considered.
Enterprise Value is Not Favorable
A company with as many issues as NCLH should be offering shareholders a tremendous discount. An investor who puts money down should be heavily rewarded in the case of a turnaround, in order to shoulder the risk. However, that is not the case here. Due to the massive dilution and debt load, the company actually has an enterprise value 7.48% above December 31, 2019 levels, as of 10/10/2021.
This makes the risk-reward and potential return on investment clearly not favorable to an investor. A resurgence in COVID-19, potentially around the holidays, or a new variant, could be a dagger to the industry.
Wall Street’s Take
Wall Street analysts are somewhat bullish on NCLH stock, with two Buy, one Hold, and no Sell recommendations. The average NCLH price target of $34.33 implies 30.3% upside.
Perhaps more telling is the fact that only three analysts have reported opinions and targets on this stock.
Summary on NCLH
Norwegian Cruise Line Holdings is an extremely troubled enterprise. An investor who bets on a turnaround play should reap “multi-bagger” type rewards. NCLH stock does not actually trade at a significant discount. If anything, it is wildly overvalued with an enterprise value above fiscal year end 2019 levels.
The pandemic forced the company to take drastic actions to avert bankruptcy. Debt and dilution were necessary, but they are troubling for investors. Therefore, NCLH stock might not be a good choice at this time or this level.
Disclosure: At the time of publication, Bradley Guichard did not have a position in the securities mentioned in this article.
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