Cruise lines are hardly the first place where we would put our money now, right? It’s an industry which has lost billions thanks to Covid-19, and media attention on outbreaks on ships has hardly had us all racing to the docks.
But cruise line shares are languishing and could offer a lot of upside for an investor who can ride out the choppy waters. Norwegian Cruise Lines (NYSE: NCLH), the world’s third largest cruise line after Royal Caribbean and Carnival, with some strong fundamentals, is a sensible pick.
The stock has fallen more than 80% from a pre-pandemic year-to-date high of $59.78 after no-sail orders implemented by the United States Centre for Disease Control (CDC) sent investors in the sector heading to safe harbours.
A company-specific crisis came in May when Norwegian Cruise Lines filed with the US SEC that it needed cash quickly otherwise it had “substantial doubt” about its chances for survival. By the next day already, it had secured $2.2 billion, enough to keep it afloat for 18 months.
The share didn’t move much on this and even with the Covid vaccine in sight, many analysts remain lukewarm on the sector. Jason Ader of Spring Asset Management, said the vaccine may not be a panacea for cruise lines and quipped that the industry is seen as a “floating petri dish”.
Travel-thirsty clients drive new bookings
If the vaccine is not a panacea though, there is hope on the horizon. The CDC has switched from a no-sail order to a conditional sailing order and is working with cruise lines to get back out to sea, albeit under stringent conditions.
Norwegian, which prior to the pandemic reported record revenues and earnings per share for six consecutive years and full bookings in Q1 while growing capacity 7%, said it expected to resume cruises in the second half, although “significant uncertainties” remain about the sailing order.
It also said bookings for the second half of this year are in line with historical ranges and pricing in line with pre-pandemic levels even taking into account vouchers issued in lieu of cancelled cruises.
Demand not enough to return cruise sector to profitability
Ader said demand isn’t enough to return the sector to profitability because of the costs of new safety measures but not all analysts agree and there’s much talk by analysts and the company about the positive impact of “pent-up” demand.
Felicia Hendrix at Barclays said of the sector, “we may be early” but the risk/reward is “the most attractive in our coverage universe”. Citing this “pent-up demand”, she upgraded the big three to ‘overweight’ from ‘equal weight’.
This raises the question of why we would single out Norwegian Cruise Lines but we are in good company. JP Morgan, also citing pent-up demand, homed in on Norwegian, as being smaller it would be more “nimble” in implementing new measures. It gave an ‘overweight rating with a $30 target price.
Norwegian’s smaller, high-end ships will undoubtedly be more appealing to customers who will likely want to avoid large crowds.
Buying Norwegian is not without its risks (which can be summed up as – can it get back to sea soon enough?) but if we look at what the company had to offer before the pandemic, then even a modest return to normal should translate into some decent gains on the share given its current low level.