Summary
Basil Leaf Capital rates Norwegian Cruise Lines a BUY. It has a great opportunity to recover from the covid pandemic. The management is operating skillfully to increase revenue and reduce costs. They are also growing by adding more ships to the fleet. The company still has plenty of risk associated with it because of the level of debt that they are operating under. We think that the opportunity outweighs the risk and that the worst of covid is behind us.
Understanding Norwegian Cruises as a Business
Norwegian cruise lines is known for its innovative approach to cruising. One of its most significant differentiators is “Freestyle Cruising,” a concept that offers passengers the freedom to dine, relax, and explore on their own schedules. The fleet is designed for fun and excitement, featuring activities like waterslides, Broadway-style entertainment, and a plethora of dining options. Norwegian has 30 ships in its fleet and 60,000+ beds. Currently they have 7 ships on order which would add another 19,000+ beds. They currently travel to about 700 destinations across the globe. Along with all of the ships they have they also have 2 private island destinations they own.
Norwegian Cruise lines is currently largely indebted because of the 2020 covid shutdown that happened when demand essentially went to 0 and they had to borrow to stay in business. Their earnings years later still have not returned due to the cost of that event.
Norwegian Cruise lines face a number of competitors in the cruise vacation space and the vacation industry as a whole. The way that Norwegian differentiates itself to compete is the target market that they are aiming for. They look to be the luxury cruise line to attract premium customers. The ship’s activities and meals are designed and meant for a more well off customer base.
Valuation Metrics
The finviz stock screener is a great tool to see performance metrics that are important to assess a company’s valuation.
Norwegian Cruise Line is valued at $6.5 Billion by market cap. The most interesting things to look at in terms of valuation is the company’s price to sales ratio and the debt levels. Since the company has so much debt the cash flow is paying down that debt instead of recording earnings. The forward Price to earnings is based on the projections that Norwegian will earn money in the future. Currently you can buy Norwegian stock for less than the revenue of the company because its price to sales is less than 1. This is an intriguing valuation because the expectation for the future is that the revenue will increase and eventually pay down its debt.
FAST Graphs Analysis
The FAST Graphs software is a powerful tool used to analyze the earnings of a company compared to the share price. The black line is share price and the orange line is earnings multiplied by 15.
Using FAST Graphs we can see that the Norwegian had been growing earnings consistently until 2020 when covid happened. The analysts are projecting that the company will be able to bring back earnings in the next few years bringing the recovery full circle.
Bull Thesis
The company is operating with skill to bring the company back from the depths of covid. Based on the investor relations presentations, the company’s strategy to improve the operations is to increase premium routes and reduce costs. The company appears to be operating effectively and on the road to recovery from the once in a lifetime event that was covid. With the company operating healthy now, then we can project that the earnings will be back to growing to how they were before covid. The company has already proven it can earn $5 a share because it has in the past. Management is improving operations and increasing its ability to return value to the shareholder. If Norwegian can return to earning $5 a share and growing like how they were before covid then the price of each share can reach $76 based on a normal multiple of 15.
Norwegian is operating extremely well now with seeing optimal bookings demand while raising prices, reducing costs, and optimizing margins. They are taking the steps to grow including adding more ships to the fleet. This is a great recovery investment opportunity from the catastrophic event that was covid.
Bear Thesis
Norwegian cruise lines is still at risk from the debt that they had to take on from the covid pandemic. Their debt to equity ratio is over 900 and a majority of that is long term debt. If there is falling demand that could happen from an economic downturn or competition becoming more popular then their cash flow could fall and the debt would put major pressure on the company. With interest rates as high as they are, companies with loads of debt are at an increased risk.
Another case against Norwegian is that other cruise lines are similar positions and may be better investments than Norwegian. The goal of the portfolio is to return at least 15% and a company with this much competition could underperform our goal. The growth rate expected isn’t anything off the charts and there are other opportunities that could be just as good if not better.
Rating
Basil Leaf Capital is rating Norwegian Cruise Lines a BUY. Norwegian Cruise Lines is operating with great efficiency and recovering from the covid catastrophe. With improved margins and a solid customer base this is a great recovery opportunity. The company shows that it can return to how it was earning before covid and trade at its mean multiple of 15. If this scenario plays out it could be trading for a value of $76 a share which would be a multiple times return on investment. The bear case of the debt is a real risk to the company especially in an economic downturn. With the customer base being a more premium customer base they are more insulated from a downturn because people who have money and take vacations will still do that in a recession. I have been on a Norwegian cruise and the operations are as smooth as the investor report claims. The management is taking steps to continue growth such as adding more ships to their fleet. All in all increasing prices, reducing costs, and adding ships is a great sign for company growth. The valuation is still pricing in the risk of the debt and we can take advantage of that and invest in a solid company at a reasonable valuation.