Of all the cruise ship operators that were swamped in the wake of the rogue wave of the coronavirus pandemic, none sank further than Norwegian Cruise Lines (NCLH -2.00%). Its stock remains in the Mariana Trench of performance, down nearly 72% in 2020 despite more than doubling in value from its March lows.
Yet with expectations it will take to the high seas again in November, investors might wonder whether now is a good time to board this stock. Let's look more closely to see if Norwegian Cruise Lines is shipshape or will remain in its watery grave.
Opening Davy Jones's Locker
With 28 ships in port, Norwegian is the third largest cruise operator behind Carnival (CCL -3.20%) (CUK -2.92%) and Royal Caribbean (RCL -1.80%). Yet like its peers, its ships have been moored for six straight months. Needless to say, that wreaked havoc on its finances.
Second-quarter revenue plunged to under $17 million from $1.7 billion the year before, while it generated adjusted losses of $666 million, or $2.78 per share, compared to an adjusted profit of $282 million, or $1.30 per share.
Of course, no one was expecting Norwegian's quarter to look anything but ugly, and the investment thesis remains whether it can survive this storm and cruise to higher profits once more.
A big key to that happening will occur this week when the U.S. Centers for Disease Control (CDC) updates its no-sail policy, which had cruise ships drydocked until Sept. 30. Analysts think it's plausible the CDC will extend the no-sail edict a bit further, but the end is in sight.
Not enough ballast
Norwegian and its peers have been incrementally canceling cruises month by month, because they don't want to unnecessarily have to reschedule or refund cruises that are set for the end of the year. But it's not really going to be until 2021 that the industry regains its sea legs.
And that could be a problem for Norwegian Cruise Lines in particular. Although the operator has taken measures to extend its debt maturities and bolster its liquidity with a $1.5 billion capital raise in July, ratings agency Moody's sees its debt load as substantial with little ability to maneuver for perhaps as long as two years, due to capacity constraints imposed by social distancing requirements.
Still, with sufficient cash on hand now, over $3 billion worth, it shouldn't capsize, giving investors cause for hope.
Storm clouds are passing
Recently, an analyst at Barclay's said Norwegian Cruise Lines and the rest of the industry are at an "inflection point," and she put in a price target on the cruise ship operator that sees its stock soaring 78% above its recent closing price.
Analyst Felicia Hendrix admits she may be early with her call, but having weathered the worst of the storm, the industry is poised for more gains. Investors should heed that caution, but because its financials have been wrecked by COVID-19, they can't look at typical metrics to gauge its value.
Wall Street, however, does forecast Norwegian will grow earnings 47% next year as it comes out of the lockdown, and there's good reason to think that could continue.
President and CEO Frank Del Rio said during the earnings conference call last month that consumers still want to take cruises. 70% to 75% of Norwegian's bookings are cash, rather than from the credits it extended to customers as a result of cancellations. Volume is still under historical norms, but 60% of those booking cruises in 2021 are repeat customers, meaning consumers are choosing to remain loyal and it hasn't lost much in the way of reputation because of the pandemic.
Considering how depressed Norwegian Cruise Lines remains, even with the gains it's made, this should be seen as a great time to buy its shares.