Like a ship in calm waters, Norwegian Cruise Line (NYSE:NCLH) trended higher since the March stock market crash earlier this year. Markets are in a wait and see mode with Norwegian Cruise Line stock. The buy thesis is simple: as cruise lines reopen, revenue will return and the sector will recover.
Norwegian Cruise still faces some near-term risks, especially when tourism is out of favor.
Catalysts For Norwegian Cruise Line Stock
The pandemic that began earlier this year frightened travelers from considering cruise lines. But people are habitual. As cruise lines suspensions ease, Norwegian may accept bookings ahead of time. Yet if the government issues a ban on cruise ship travel, then stocks could trend lower.
On Sept. 3, competitor Carnival (NYSE:CCL) announced that it would restart cruise operations. The world’s largest cruise company started sailing its Italy-based Costa Cruises in Italy. On Nov. 1, its Germany-based AIDA cruises will resume. The restart is a positive catalyst for Norwegian, whose market capitalization is less than half that of Carnival or Royal Caribbean (NYSE:RCL).
Travelers, especially those who are retired and have plenty of disposable income, are highly likely to book trips. The risk of getting infected does not discourage them from the boredom of being landlocked. If Norwegian does not get a spike in bookings, it has the flexibility of selling tickets at a discount.
Near-Term Risks
The fall season is also the start of the flu period. Plus, the novel coronavirus infection rates spike when people are confined indoors and are close to each other. With a mask and while practicing physical distancing, the spread may moderate.
Still, the spike in daily cases of coronavirus last month may be due to traveler volume. The school reopening world-wide may also lead to a so-called second wave (or a continuation of the current wave).
The more cases reported, the more likely the government may restrict cruise ship departures. It is also a risk for restaurants, hotels, and other tourist-based businesses.
At the end of last year, Norwegian’s total debt/equity trended lower, while interest coverage improved:
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In the second quarter, Norwegian posted massive earnings per share loss of $2.78. Revenue plunged 98.98% to $16.93 million. The voyage suspension, from May 20 to July 30, took a toll on quarterly results. In July, the triple-tranche capital raise removes its short-term bankruptcy risks.
By investing in this cruise line now, the bet has a 50/50 chance of paying off. If countries decide to let tourism resume, with strict hygiene and a focus on health and safety from the virus in place, then the stock will trade higher.
2021 Opportunity
Norwegian cut marketing efforts but still saw a demand for cruise vacations, especially in 2021. Its booking volumes are below historical levels but 70% to 75% of its cumulative bookings for 2021 are cash bookings. Conversely, as of Aug. 3, about 60% of guests on canceled voyages requested a cash refund.
The cruise line cut staff pay and other costs. Furloughing employees will help lower costs, while a reopening will allow Norwegian to quickly restart its business. CEO Frank Del Rio acknowledged that travel agent distributors furloughed employees and smaller agents closed down. But he also said, “It wasn’t too long ago that many people predicted the demise of travel agents. And if anything, over the years, they’ve gone stronger.”
Price Target and Your Takeaway
Analysts are cautious on NCLH stock. Seven out of the nine analysts rate the stock as a “hold” (according to Tipranks). Conversely, based on its future cash flow, SimplyWall.St has a $27.93 fair value target.
Given the near-term risks ahead, investors who missed the bottom should not buy Norwegian Cruise stock at this time. Existing investors should wait and see, betting on a tourism industry rebound.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
