On Friday, Sept. 25, Barclays analysts sent a bullish ripple through the cruise industry. Among several other upgrades, they gave a bullish nod to Norwegian Cruise Line (NYSE:NCLH). The move helped kickstart a rally, with the stock going up 13.7% the day of the upgrade.
The analyst raised their rating on the stock to “overweight” from “equal-weight.” They also gave the same boost to Royal Caribbean (NYSE:RCL) and Carnival (NYSE:CCL).
Look, I get it. How can the analyst bump these names to a buy-equivalent rating when business is at a standstill? That’s my issue too, but everything is worth a fair look in this market.
Analyst Felicia Hendrix contends that the cruise industry has seen the worst of the novel coronavirus pandemic and investors can begin to focus on the positives of the future rather than the negatives of the past. She reasons that, “while chances are high (in our view) that the CDC extends the date again (likely into 4Q20), we believe the comments from the agency will be positive and could signal a near-term return to cruise.”
No Cruise, No Revenue
My biggest issue is the same issue that I have with Nikola (NASDAQ:NKLA). Well, sort of. The cruise companies are simply not generating revenue. The longer the outbreak lasts — and let’s be honest, the situation in the U.S. hasn’t gone well — the more likely it is the no-sail orders persist.
I do believe that when the no-sail orders lift, cruise-goers will return. That’s with or without Covid-19, because there are a large group of consumers that don’t care or aren’t worried about the virus. But until that day comes, Norwegian and its peers are going to struggle. It’s plain and simple: no cruises equals no revenue.
It’s not quite that black and white, but for investing purposes, it’s hard to get too excited about the cruise industry when sailings are halted and cash burn continues to eat away at the financials.
Is There Value With Norwegian?
At the end of the day, investors are always looking for value. Perhaps not in the traditional value vs. growth argument or deep-value stocks. But value in the sense that what we buy today is done in anticipation that it will be worth more in the future.
No one wants to sink cash into Norwegian and watch the share price get cut in half before rallying again.
Depending on one’s time horizon, yes, there is value here. But it’s also going to be a volatile and bumpy ride. What we really need to see is the no-sail order lifted and for the coronavirus to get under control. Until those two things happen, Norwegian & Co. will face major headwinds.
Take forward estimates for example.
After earning $5.09 per share last year, Norwegian is forecast to lose $8.19 per share this year. While fiscal 2021 (next year) is likely to see its estimate change, it currently calls for a loss of $4.33 per share. While that’s much better than the loss Norwegian is expected to have this year, it’s still a pretty poor result.
Revenue is forecast to drop nearly 80% this year, before growing almost 100% next year. However, any investor who’s studied a trading-drawdown table knows that if you lose 80% and “only” see a 100% rebound, it’s still significantly below the starting point.
In fact, to fully recover after an 80% decline, one needs a 400% rebound to get back to where they started.
For Norwegian, that means next year’s revenue estimate for ~100% growth would equate to sales of “just” $2.65 billion, which is still 41% below 2019’s $6.46 billion in revenue.
The Bottom Line on NCLH Stock
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What will it take for the world to get back to normal? Is it a vaccine? Is it a rapid, low-cost test hooked up to a mobile app, like the one from Abbott Labs (NYSE:ABT)? I don’t know. But for many stocks, we’ll need to see a re-acceleration in business before we can see sustainable rallies. Or at least the hope for a re-acceleration in business.
In that sense, it has me gravitating toward stocks like Southwest Airlines (NYSE:LUV) and Delta Air Lines (NYSE:DAL). These stocks will recover when travel picks up pace. However, unlike the cruise industry, there isn’t a no-fly order in place.
For Norwegian, trailing free cash flow sits at -$2.49 billion. Of that deficit, $1.39 billion of it came last quarter. Of course, last quarter also saw a 98.9% decline in revenue, so that didn’t help matters. In the quarter, management said:
In recent weeks, we have taken further action to bolster our liquidity position in response to the COVID-19 global pandemic, including our highly successful $1.5 billion gross triple-tranche capital raise in July, which we believe positions us to withstand a scenario of prolonged voyage suspensions.
Last quarter, the company reported $2.25 billion in cash and $2.75 billion in current assets. That slightly edges out current liabilities of $2.58 billion and is an improvement from the prior quarter. That said, total debt is now north of $10 billion, which is almost double the prior year-over-year reading. That is not the end of the world, but investors will want to keep an eye on it.
Norwegian is probably safe from a liquidity situation, but at the end of the day it’s not the best stock to buy out there.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
