Shares of the fourth-largest cruise operator, Norwegian Cruise Line Holdings (NCLH 4.64%), are up 11% this week as of noon ET Friday. On Tuesday, activist investing firm Elliott Management announced it had built a 10% stake in the cruise line behemoth. Given Elliott Management's solid long-term track record led by founder Paul Singer, the market moved Norwegian's shares higher on optimism for a turnaround.
NYSE: NCLH
Key Data Points
Can Norwegian cruise to smoother seas?
After Norwegian delivered annualized total returns of 13% from its IPO in 2013 through 2020 -- before plummeting amid the pandemic -- its stock has only generated total returns of 35% over the last three years. Meanwhile, peers Carnival Corp. and Royal Caribbean are up 181% and 333% over the same time. Due to these disappointing results -- and dismayed by the board's recent selection for a new Chief Executive Officer -- Elliott is stepping in to try and shake things up for the better.
Image source: Getty Images.
Some of Norwegian's biggest issues that Elliott noted were:
- its once industry-leading EBITDA margins from 2013 are now middle of the pack among its peers at 36%
- unit-level cruise costs have jumped 44% since 2013, compared to just 30% for Royal Caribbean and 21% for Carnival
- SG&A expenses rose 248% since 2013, versus 125% for Royal and 81% for Carnival
- Norwegian not capitalizing on its private island, Great Stirrup Cay, as Royal did with Coco Cay
- wasteful spending and culture in general, focusing on unnecessary luxuries
- selecting an insider from its board for CEO, despite not having much cruise line experience
Elliott hopes to overhaul the board, appoint new management, and rein in excessive spending to boost its EBITDA margin from 36% to 45% over time. Trading at just 9 times forward earnings, the market has Norwegian priced to go out of business, rather than as a stock operating in a cruise industry that has steadily become a more popular vacation option over time. This turnaround isn't necessarily my type of investment, but I'd imagine Elliott can only help, and the news makes the stock an intriguing watch going forward.
