Cruise stocks, including Norwegian Cruise Line Holdings (NYSE:NCLH) stock, have been on a wild roller coaster ride in 2020.
First, cruise stocks tanked as the novel coronavirus pandemic emerged globally and shut down the entire cruise industry. Throughout February and March, NCLH stock dropped nearly 90%.
Then, cruise stocks staged a jaw-dropping comeback in April and May, as Covid-19 hysteria abated and the economy and consumer behavior normalized. NCLH stock soared nearly 300% from its Covid-19 lows into early June.
Most recently, cruise stocks have taken another leg lower, on fears that a second wave of Covid-19 is emerging in the U.S. From its early June highs, NCLH stock has shed more than 30%.
What’s next in this wild roller coaster ride for cruise stocks and NCLH stock? A big and prolonged recovery. Here’s why.
A Persistent Economic Recovery
As I’ve said before on InvestorPlace, the current U.S. economic recovery is persistent.
Over the past few weeks, we’ve had: 1) arguably the most controversial filmed police killing of all time; 2) tons of protests and riots across the country, including some that have turned violent and forced store closures; and 3) a sharp uptick in confirmed Covid-19 cases across several states.
Through it all, the U.S. economic recovery has persisted. Consumer mobility has increased. Restaurant and store foot traffic has improved. Consumer search interest in all things travel related has only grown. Overall economic activity has sustainably perked up. The stock market has kept ticking higher.
What does that tell you? The U.S. economic recovery is here to stay – for good.
Under the hood, what’s happening is that cabin fever consumers and businesses are desperate to get back to some semblance of normal. As such, consumers and businesses alike are both increasingly learning how to keep the world turning while simultaneously managing Covid-19 risks via things like social distancing, plastic barriers and mask-wearing.
In other words, we are learning how to get the best of both worlds (and keep both our jobs and our health) by doing a balancing act between staying safe and doing things.
Both parties will get better at this balancing act over the next few months. As they do, the human costs of the virus will remain relatively mitigated, while economic activity will continue to perk up.
Against that backdrop, stocks will keep rallying – especially mobility-oriented stocks, like cruise stocks.
NCLH Stock Is Undervalued
By my numbers, Norwegian Cruise stock could rise more than 65% over the next 18 months as the world gets back to normal.
The mental framework is simple.
Fiscal 2020 will unarguably be an awful year for Norwegian. But consumers will start traveling again in 2021, boosted by low travel prices, pent-up demand, robust government stimulus and a potential vaccine (which will go a long ways in restoring consumer confidence). To that end, Norwegian’s numbers will meaningfully improve in fiscal 2021.
Then, by the start of fiscal 2022, we will have gone through a full year of cruise operations, with a vaccine, and hopefully without many (if any) serious Covid-19 cases. Consumers will regain their confidence in cruises. Global cruise demand will recover to levels just shy of 2019 levels. And Norwegian’s revenues will nearly recover to where they were in 2019.
From a numbers perspective, that implies somewhere around $6 billion in revenues by 2022. Profit margins won’t fully recover. Historically, they have run around 18%. But higher cleaning costs going forward will push steady-state operating margin down closer to 10% to 12%.
Assuming so, my modeling suggests that by 2022, Norwegians’ earnings per share could rebound to $2.50. Based on a historically-average 12-times forward earnings multiple, that implies a 2021 price target for NCLH stock of $30.
NCLH stock trades hands at about $15. Thus, shares have visible runway to 65%+ upside over the next 18 months.
Bottom Line on NCLH Stock
The recovery in NCLH stock will not be smooth. But make no mistake. NCLH stock is already on its post-Covid-19 recovery path. This recovery will persist. Ultimately, it will guide the stock to far higher prices over the next 12 to 18 months.
So stick with the chop in NCLH stock. Ride out the turbulence. Buy big dips. And hold for the next 12+ months.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
