What’s the verdict on cruise stocks like Norwegian Cruise Line (NYSE:NCLH)? Like its peers, Norwegian Cruise Line stock has bounced back significantly from its novel coronavirus lows. But, as its ships sit idle, shares continue to trade far below their pre-pandemic highs.
Yet, as uncertainty remains, there’s still opportunity to make a “bottom-fisher’s bet” in this space. That is to say, if it’s “darkest before the dawn” right now, today’s the time to buy cruise stocks.
Granted, it’s tough to be confident in a comeback. Sure, things could be back to 100% by the second half of 2021. However, pandemic recovery timelines are anything but certain.
So far, investors have been banking on a vaccine coming out by mid-2021 to fuel a comeback. But, what happens if it takes longer-than-expected to bring a vaccine to market? Say goodbye to a swift recovery for the cruise lines.
Also, who’s to say cruise lines will see a tremendous bounce-back in business on the heels of a vaccine? Sure, as MarketWatch opined last month, history may say a loyal fan base has a short memory. But, even the biggest cruise ship aficionados could play it safe in the coming years.
With this in mind, cruise stocks remain a high-risk, but high potential return proposition. There may be opportunity for those with patience, and a high-risk appetite. But for most, there are more certain buys out there.
Norwegian Cruise Line Stock and an End to No Sail Orders
Earlier this month, Norwegian, along with its rivals Carnival (NYSE:CCL), and Royal Caribbean (NYSE:RCL) moved higher on news of a better-than-expected reopening timeline.
Yet, in the weeks since, Norwegian Cruise Line stock has slightly pulled back. Why? While that bit of positive news helped to spark some interest, all bets are off regarding when “No Sail Orders” will be over and done with.
Back in July, the Centers for Disease Control (CDC) extended No Sail through September 30. And, given a vaccine remains a work in progress, it’s seems inevitable these orders will be extended yet again.
But, guessing when cruise lines can resume operations out of U.S. ports is just one factor to consider. Another key area of importance is liquidity. And while Norwegian Cruise Line may have enough cash in its war chest to ride out continued tough times, there’s no guarantee there are big potential gains for those who hop aboard today.
Enough Liquidity to Ride Out The Storm?
You can’t talk about hard-hit industries without talking about cash burn. Just like with the airlines, handicapping pandemic-affected stocks hinges heavily on their capability to weather the storm.
Sure, as InvestorPlace’s Faisal Humayun wrote Sep 1, Norwegian may have enough cash on hand to endure a continued shutdown. With a total liquidity position of $2.5 billion, and an estimated $160 million per month cash burn, there’s enough to keep the lights on through 2021. Not only that, as Humayun discussed, the company could further minimize cash burn by deferring capital expenditures, or via pay reductions/extended furloughs.
Yet, don’t mistake ample liquidity for security. The cruise line may have enough cash to avoid going under in the next year. The real question is whether enough business will come back (assuming operations come back online sometime next year).
As this commentator wrote, cruise traffic could remain depressed well into 2021. And that’s assuming a coronavirus vaccine arrives on schedule. What happens if we don’t have a widely available vaccine until the end of next year? That could cut things a little close.
And cutting it close doesn’t bode well for Norwegian Cruise Line stock. If it ends up down to its bottom dollar, with no cash flow coming in, it’s hard to see shares retaining their current valuation, much less trading above today’s price levels (around $17 per share).
All Bets Are Off, But Consider A Buy if You Have A High Risk Appetite
With so much negative sentiment priced into cruise stocks, it seems like going contrarian is the best move for investors looking at the space today. On the other hand, it’s tough to anticipate a rapid recovery for the industry.
Firstly, everything hinges on a vaccine. And said vaccine probably won’t be available at least until mid-2021. Secondly, even a vaccine may not be enough to entice travelers back on the high seas. Thirdly, despite ample liquidity, an extended recovery timeline may mean buying shares now, in anticipation of a rebound, may not be worth the trouble.
So, what’s the call here with Norwegian Cruise Line stock? If you have a high-risk appetite, and the patience to hold for several years, by all means enter a position. Otherwise, look elsewhere for comeback plays.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.