Cruise line stocks stormed back into investor fancy earlier this year, but they have corrected sharply since their summertime highs. Norwegian Cruise Line (NCLH -1.60%) stock is now down 36% since hitting a high-water mark in late July.
Its larger publicly traded peers have held up better. Carnival Corp. and Royal Caribbean Cruises are down just 24% and 7% respectively from their summer peaks. Norwegian has come through with a 22% stock increase in 2023, but Royal Caribbean shareholders have seen their shares more than double this year.
There are some legit reasons for Norwegian being a laggard among its fellow seafarers, but there's also a case to be made for it leading the way from here. The country's third-largest cruise ship operator can pop tenfold in the coming years if it catches the right waves along the way. Let's hop aboard to take a closer look.
High seas and low tides
Norwegian Cruise Line posted mixed financial results earlier this month. The good news is that revenue clocked in at a record $2.536 billion, in line with expectations and a 57% surge over the prior year's admittedly depressed results. More importantly, its top-line showing was 33% ahead of where it was during the same seasonally potent summertime quarter in 2019. In other words, it's now ahead of where it was before the pandemic shut the industry down for a painfully prolonged period. The bottom line exceeded analyst targets, building on its return to profitability in the second quarter after more than three years of quarterly losses.
The bad news that kept the stock down was its uninspiring guidance. With geopolitical events weighing on near-term sailings, its projected occupancy percentage for the current quarter is well shy of where it was in the holiday quarter of 2019. After back-to-back quarters of profitability, Norwegian is bracing investors for an adjusted deficit of $0.15 a share in the fourth quarter. Wall Street pros were modeling a slightly better-than-breakeven performance.
This may seem like a pretty ho-hum backdrop for a potential 10-bagger, but let's dive deeper than just the current quarter. Norwegian mentioned in its earnings call that bookings for the next 12 months remain at record levels and at higher prices than the year before. The long-term outlook for cruising demand remains strong, and with cost controls at Norwegian and fuel prices coming down after surging two months ago the outlook heading into 2024 is somewhat refreshing.
Analysts did slash their 2024 profit forecasts after Norwegian's last financial update, but the stock is now trading for less than 12 times the $1.27 a share in adjusted earnings that Wall Street is forecasting. The shares soaring tenfold would price the stock at a preposterous 120 times next year's bottom line, but the argument here is that it will take several years for the gains to materialize.
What's the point of focusing on 2024's challenging results in a multiyear investment strategy? Analysts see explosive earnings growth at Norwegian as cruise vacations get back to penetrating the mainstream travel market. Carnival, Royal Caribbean, and Norwegian also made the most of the operating lull to refresh their operations and their offerings. The end result is shaping up to be a more resilient industry than it was in its pre-pandemic prime. What analysts see Norwegian earning the next few years is pretty impressive.
- 2024: $1.27 a share
- 2025: $1.78 a share
- 2026: $2.82 a share
- 2027: $3.46 a share
With profitability expected to nearly triple between 2024 and 2027, you can buy the cruise line shares at a market cap that's just 4.3 times its 2027 profit outlook. Don't be surprised if reality is even kinder. Norwegian has posted double-digit percentage beats in its last three quarters.
Image source: Getty Images.
Cruising in the right direction
Don't underestimate the power of cruise line stocks as they reverse the bearish narrative. Carnival, Royal Caribbean, and Norwegian had to do a lot of scary things to stay literally and figuratively afloat after the COVID-19 crisis decimated the business. The share count and debt load at Norwegian has roughly doubled since the end of fiscal 2019, but the bloat isn't permanent. Now that Norwegian has returned to healthy annual profitability and cash-flow generation it can get back to reducing its leverage and de-risking its balance sheet the way it was for five years before the pandemic rammed its operations.
Norwegian concedes that it will take a few years to return its credit rating back to investment grade, a milestone that will dramatically shave its financing costs. It can still make its own luck between now and then, using its newfound free cash flow to pay down its debt and ideally also buy back stock at today's historically depressed prices. Naturally, it will also invest in new ships and updates to boost its already improving monetization.
The future is bright for the cruise line industry in general and Norwegian Cruise Line in particular. The skies are a little cloudy right now, but things are brighter on the horizon.
