Like other cruise ship operators in 2020, Norwegian Cruise Line (NYSE:NCLH) stock has suffered a massive crash. Year-to-date, NCLH stock is down over 70%. As one of the biggest cruise lines in the world, its shares get considerable investor and trader attention.
On Sept. 17, P&O Cruises, which is owned by the Carnival (NYSE:CCL) group, canceled all sailings until early 2021 due to the pandemic. P&O president Paul Ludlow said, “With evolving restrictions on travel from the U.K., unfortunately it is necessary to cancel these itineraries.” Although Norwegian has not made a similar decision at this point, cruise lines typically follow in each other’s steps.
Recent research by Luc Renaud of Montreal’s University of Quebec, concludes, “There are … significant uncertainties on the horizon, including the inability to travel to different regions because of health-related restrictions and passengers’ financial capacity given the deterioration of the global economy. As well, despite the relative loyalty of ‘repeat cruisers’, it is impossible to predict customers’ reaction to the industry’s battered reputation.”
So, as we get ready to enter the final quarter of the year, investors wonder if now is a good time to buy Norwegian Cruise Line stock.
In February 2020, the shares were trading shy of $60. Now entered the trading week on Monday around $17.50 before getting pummeled down almost 8%. While broader markets are under pressure and until we have more clarity as to when cruises can begin to set sail again, NCLH stock is not likely to make a new leg up. Instead, it is likely to trade in a range in the coming weeks. Therefore, potential investors may consider buying into shares of other companies that may offer better growth potential.
A Look at Quarterly Earnings
The group operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands, which offer itineraries to around 500 destinations worldwide. It has a combined fleet of 28 ships and close to 60,000 berths.
In early August, Norwegian announced Q2 results. Revenue of $16.9 million meant a 99% decline YoY. Adjusted net loss was $666.4 million, compared to a $282.1 million net income a year ago. Adjusted loss per share was $2.78. The group had reported earnings per share (EPS) of $1.30 in the prior-year quarter.
Management noted cash and cash equivalents were $2.3 billion and long-term debt $10.3 billion. At the end of 2019, before the pandemic disrupted operations, the debt figure had been $6.1 billion. Analysts were also concerned to hear that the monthly cash burn is around $160 million per month.
The company was unable to provide an outlook for the rest of the year. Put another way, the post-coronavirus world looks different for Norwegian Cruise Line and its stock.
Developments over the past six months have been bad news, or even black swan events, not just for Norwegian, but for other cruise companies, including Carnival and Royal Caribbean Cruises (NYSE:RCL). Since the release of Q2 results, NCLH shares have been range-trading between $15 and $19.
Should You Invest in Norwegian Cruise Line Stock Now?
Yesterday, a joint health panel formed by Royal Caribbean and Norwegian unveiled a comprehensive plan to resume cruises from U.S. ports. The plan submitted to the Centers for Disease Control includes Covid-19 tests for all crew members and passengers, who would need to produce a negative coronavirus test result one to five days before boarding. “The Healthy Sail Panel identified five areas of focus every cruise operator should address to improve health and safety for guests and crew, and reduce the risk of infection and spread of covid-19 on cruise ships,” the companies said in a statement.
In the U.S., the cruise industry, which supports around half a million jobs, under a No Sail Order until Sept. 30. About half of these jobs are centered around Miami.
On Sept. 16, Florida Senators Rick Scott and Marco Rubio introduced the Set Sail Safely Act, a bill aimed to get cruise ships sailing again. The act would require relevant federal agencies and private sector stakeholders, including cruise lines, to work together to put together a workable plan for the safe resumption of operations. However, it is too soon to know the effect of the collaboration between the U.S. government and businesses.
In previous weeks, while broader markets reached new all-time highs, cruise shares traded at distressed levels. Now most indices have come under pressure, which does makes the outlook for shares like NCLH rather choppy. Going forward, there will three considerations — demand, supply and cost control — for the success of cruise companies and their stocks. Unless sailings can resume soon, the cruise operator will continue to burn cash and raise more debt in the near future.
Therefore, investors in Norwegian Cruise Line stock should not expect smooth sailing any time soon. You may want to look at other sectors in equity markets.
The Bottom Line
Are you currently a shareholder in Norwegian Cruise Line stock? If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon, i.e., Nov 20 expiry. Such a covered call position would offer some downside protection. You would also be able to participate in a potential up move.
The U.S. market offers plenty of opportunities for investors. The recent decline has made many top names cheaper than they were in August. Investors may want to place their capital across other stocks or exchange-traded funds (ETFs).
For example, they may consider ETFs that may also have small exposure to NCLH stock. They include the PowerShares S&P 500 High Beta Portfolio (NYSEARCA:SPHB), the iShares Morningstar Small-Cap Value ETF (NYSEARCA:JKL), and the Vident Core US Equity Fund (NYSEARCA:VUSE).
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
