What happened
Shares of Norwegian Cruise Lines (NCLH 5.39%) fell 20.1% in May, according to data from S&P Global Market Intelligence.
One might have thought Norwegian would be taking off around this time, as people get back to traveling and the cruise industry gets back to something approaching "normal" after a two-year pandemic.
However, Norwegian's recent earnings report missed expectations, and higher fuel and food costs threaten the industry's recovery.
So what
Norwegian reported its first-quarter earnings on May 10. Revenue came in at $521.9 million, well below expectations, and its non-GAAP (adjusted) net loss per share was ($1.82), also below expectations. The omicron variant caused some cruising delays early in the first quarter, but Norwegian held with its premium pricing, which slightly affected the company's capacity load factor.
Still, it likely wasn't the company's earnings that caused the stock to drop so much. May was a tumultuous time for the markets, leading to a "risk-off" mentality, as investors fretted about inflation and what effect that might have on various companies. Unfortunately for cruise lines, their main input costs are food, fuel, and labor -- three of the areas seeing the worst inflation right now. Moreover, given that these costs are felt by every consumer, inflation also threatens consumer discretionary spending, with cruises certainly being one of those things. Not only that, but all the cruise lines are more heavily indebted than pre-pandemic, and interest rates are going up, too.
Norwegian has 41% of this year's fuel consumption hedged and 24% of next year's, but it's still susceptible to rising oil prices as it looks to the future. While Norwegian has thus far stuck to its guns on pricing, given its higher-end brands, its ships are not yet back to full capacity. Therefore, there may be some doubt as to when it may get there and at what prices.
Meanwhile, Norwegian is still burning cash, with a near-$1 billion loss in the quarter, as the return to a normal cruise industry has been delayed several times by the delta variant, the omicron variant, and then the Russia-Ukraine war. Moreover, Norwegian is introducing four new ships over the next 18 months. That's a somewhat risky proposition if another "black swan" event delays the return of the cruise industry.
That being said, as long as there are no such events, CEO Frank Del Rio believes Norwegian could return to record-high adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023 on the back of these new premium ships.
Image source: Getty Images.
Now what
The restart of cruising has no doubt been frustrating for customers and investors alike, but after its May plunge, is Norwegian now a buy?
One director thinks so. On May 23, Norwegian Director Russell W Galbut bought over $1.5 million worth of shares on the open market at prices between $15 and $15.25, signaling confidence in a turnaround.
It's true that in 2019, Norwegian made $930 million in net income, versus a market cap of just $6.7 billion today, good for a price-to-earnings ratio of just 7.2 based on 2019 numbers. That's certainly cheap; however, Norwegian also has about twice the debt load it had back then, with $13.7 billion outstanding, versus $6.8 billion in debt back in 2019.
When you combine that with higher interest rates and much higher fuel and food costs, it seems Norwegian will have to hike prices on consumers by a good amount in order to maintain its margins. So, while the stock looks cheap, there are still significant risks involved.
