tiprankstipranks
Why Norwegian Cruise Lines Stock is Attractive Despite Rough Waters
Stock Analysis & Ideas

Why Norwegian Cruise Lines Stock is Attractive Despite Rough Waters

Story Highlights

Norwegian Cruise Lines stock seems too cheap to ignore following its latest slump. Though recession and inflation woes could take a toll on coming quarters, the firm does have a pathway to recovery.

Cruise line firm Norwegian Cruise Lines (NCLH) has been treading water for quite a while now. Cruise line stocks have been anything but steady ships of late as investors brace for the end of summer travel season, a potential viral resurgence, and a potential recession. With recent insider selling activity and a heavy debt load, investors may be inclined to jump ship before things get uglier. Despite the rough patch ahead, I remain bullish on NCLH stock at its current valuation.

Norwegian Cruise Lines: Headwinds are Likely Temporary

The losses keep racking up for millennial-friendly Norwegian Cruise, with second-quarter per-share losses coming in wider than expected, at -$1.14 versus the consensus estimate of -$0.88. A slew of headwinds was to blame for Norwegian’s bottom-line miss, including higher fuel costs and labor woes. Indeed, many firms have grappled with such inflationary headwinds non-stop over the past year.

Such woes are just a sign of the times and shouldn’t be viewed as a long-lived overhang. As transitory headwinds fade, Norwegian Cruise will find itself sailing into an economic slowdown.

Revenues also came in at $1.2 billion, well above the $522 million posted a quarter prior but still below analyst estimates. NCLH stock plunged initially following the results, but shares have been volatile (in both directions) ever since.

As consumer wallets get thinner, demand for cruises could grind to a halt. Further, there’s a bit of concern that yet another COVID-19 surge could be in the cards as soon as autumn. Indeed, it’s looking like a cold winter for the cruise line stocks. That said, I do think there’s too much pessimism baked in here.

Looking out three to five years, I expect cruise demand to be strong. There still seems to be pent-up demand for travel experiences, especially among the young millennial cohort. Lockdowns and recessionary headwinds may have caused many to postpone their voyages. In any case, I think it’s hard to bet against cruise stocks after they sail out of one of the worst multi-year hurricanes in their history.

Of the cruise lines, Norwegian seems to be one of the best bets. Their ships are stacked, and its CEO Frank Del Rio is doing a relatively decent job of steadying the sails amid unprecedented conditions.

Norwegian Cruise Lines Has a Pathway to Recovery

Norwegian Cruise Lines stock is beyond cheap at 2.5x sales, below the industry average of 5.4x. Undoubtedly, sky-high fixed and operating costs can make the busts feel so much more painful. While there’s still an uncomfortable amount of debt sitting on the balance sheet, the firm is in a place to shore up financial flexibility with time.

Norwegian could return to profitability as soon as the second half of this year. Further, there’s $1.9 billion in cash and cash equivalents that give the firm a bit of wiggle room as it looks to push toward a more normal environment.

With inflation pressures likely to ease in the second half, Norwegian could have the means to really surprise to the upside in its coming quarters. Many investors have grown overly bearish as a result of inflationary pressures and upward pressure on wages. Still, Norwegian is doing the best it can to operate in what could be the last wave of the storm.

Now, a recession year won’t make it smooth sailing for the cruise lines. However, I do think far more than just a recession is baked into NCLH shares at these levels. With such low expectations comes a chance at considerable upside potential.

Is Norwegian Cruise Line Stock a Buy?

Turning to Wall Street, NCLH stock comes in as a Moderate Buy. Out of seven analyst ratings, there are three Buys and four Holds.

The average Norwegian Cruise Lines price forecast is $17.43, implying upside potential of 25.1%. Analyst price targets range from a low of $13 per share to a high of $26 per share.

Conclusion: Investors are Underestimating NCLH’s Recovery Potential

A recession never bodes well for the “expensive” experiential plays. That said, I think many are underestimating the magnitude of the post-recession boom that could be in the cards at some point over the next three years.

There’s still a lot of pent-up travel demand. Although experiences like cruising can be put off for years at a time, many will eventually come around to booking their tickets. Once the tides are right (pardon the pun), with minimal COVID-19 cases and robust consumer sentiment, Norwegian Cruise Lines will be ready to meet the demand.

In the meantime, the company needs to move through what could be the last round of headwinds. Fortunately, Del Rio and company have become used to operating under such challenging conditions. Even if choppier waters are ahead, the firm has the expertise and balance sheet to power through the period of cyclical weakness.

It will be a slog en route to the next cyclical upswing, but investors appear to be in very good hands with a company that I believe stands out in the hard-hit industry.

Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles