So what: The cruise operator found itself giving up ground after results of the U.K.'s Brexit vote were tallied on June 24. Norwegian Cruise Line stock, which had lost nearly 5% in the first three weeks of June, sank another 9% on the 24th.
Like peers in the travel and leisure industry, Norwegian is now subject to uncertainty over how the exit of the U.K. from the European Union will affect its operations. The company was already experiencing difficulties in Europe. In its first-quarter 2016 earnings report released in May, Norwegian cited terrorist attacks in Paris, Brussels, and Istanbul as a drag on European cruise revenue.
On one hand, the consequences of the Brexit could actually provide a boost to Norwegian's European business, as North American and Asian travelers may take advantage of a weaker euro, which has already declined more than 3% since the Brexit referendum.
But if the U.K. slips into recession, and perhaps Europe as well, as some economists have predicted, Norwegian's earnings momentum would probably be blunted. According to company management, Europeans make up roughly 30% of Europe-originated cruises. The company notes that these travelers tend to spend less at sea than their North American counterparts. Thus, a decline in ticket revenue and further reduced onboard spending on European cruise routes -- not to mention other destinations to which Europeans travel -- will hurt. In such a scenario, it might be difficult to replicate Q1 2016's relative outperformance, in which revenue rose 15%, and adjusted earnings per share leaped 41%.
Now what: Before the Brexit vote, European weakness in Q1 was offset by North American passengers, who opted instead for destinations such as Hawaii, Alaska, and the Caribbean. If post-Brexit uncertainty rises, especially in the form of a more cautious European customer, high-spending North American passengers may provide a key defense for the company.
Norwegian will also look to the Asia-Pacific region to absorb some of the slack. The cruise line is scheduled to launch its first purpose-built ship for the Chinese market, the Norwegian Joy, next summer. The ship's upcoming christening represents the company's success in this rapidly expanding market. But it also suggests a potential strategy for a revenue pivot, should conditions on the continent worsen.
Asit Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.