Which of the Cruise Stocks Will Rule the Waves? $NCLH Stock

NYSE:NCLH   Norwegian Cruise Line Holdings Ltd.
$77 billion wiped out in a matter of months; that’s how much the cruise industry lost between March and September 2020. The once booming industry was in for a bumpy few years when the pandemic hit and it became one of the first hotspots to catch the media’s attention. With everyone locked in their houses the tourism industry took quite a hit, and cruise stocks plummeted to record lows. Two of the hardest hit cruise stocks were Norwegian Cruise Lines (NCLH) stock which fell from $59.65 per share to just $7.80 in March and Carnival Cruise Line (CCL) stock which dropped 84% to its lowest price since 1992.

Now that Covid concerns have eased, the tourism industry is rebounding as people begin planning holidays again. However, cruise stocks like Norwegian Cruise line stock and Carnival Cruise stock have been struggling to recover. Both major cruise lines recently announced that COVID regulations will no longer be enforced onboard ships and as pent up demand for traveling leads to increasing numbers of travelers, the tourism sector appears on track to recover. But will two of the three biggest cruise line stocks return to their pre-pandemic highs?

Both cruise line stocks are laden with debt from the pandemic, and neither have attracted the same number of passengers as they had pre-pandemic. However, demand for cruises has not disappeared and the cruise line that survives will have the opportunity to take up more of the once booming market. While their stocks’ recovery may take years, these bottomed out cruise stocks could offer a unique opportunity for investors willing to wait for passenger numbers to fully recover.

COVID’s Toll on Cruise Stocks
A lifetime ago, which was apparently only 2019, the cruise industry was seeing healthy growth and became a big market in the tourism sector. Some even argue that the $150 billion cruise industry was the fastest growing part of the tourism sector. At the time, this seemed to be the case with the number of cruisers reaching an all time high of 29.7 million in 2019. An additional 32 million passengers were expected for 2020 as the industry grew at a CAGR of 11%. What could possibly go wrong? As it turned out, absolutely everything.

A few months later, the pandemic hit and some of the first COVID hotspots were cruise ships. In February 2020, the infamous Diamond Princess – owned by Carnival Cruise Line – was the first to catch the media’s attention when 800 of its passengers contracted COVID-19. This was only the first cruise ship to be nicknamed a “floating petri dish” and the rest of the industry soon fell like dominoes.

This was a disaster for cruise line stocks. In six months, the industry had lost $77 billion and annual revenue for the big three cruise lines – Carnival Cruise Line, Royal Caribbean, and Norwegian Cruise Line – fell 73-80%. In the first four months of the pandemic, CCL suffered a net loss of $4 billion and it was burning through $650 million a month. The company eventually had to sell several ships to cut expenses.

Tricky Road to Recovery
Even as the world began to recover, traveling proved to be more complicated than many expected and cruise lines have faced many difficulties attracting passengers back. Cruises to nowhere were one of the first solutions since ships were not allowed to dock anywhere. However, these trips were not in high demand and the solution was soon abandoned.

Once demand returned, CCL and NCLH were faced with a new problem. Remember the employees the cruise lines laid off during the pandemic? Well, hiring back old and new personnel proved to be an issue resulting in shorter restaurant hours for Carnival and canceled trips for Norwegian. Even now, CCL and NCLH employ less people, but pay them more. Vacancies as well as stringent COVID regulations proved to be a hurdle for the industry at the start of its recovery.

The Light at the End of the Tunnel
However in 2022, many popular tourist destinations lifted COVID restrictions as well as cruise lines. As is, the industry is expected to perform just slightly worse than it did in 2019 – a huge improvement from 2020 and 2021. Despite demand picking up, the debts accumulated by both NCLH and CCL present a long-term concern to investors watching cruise stocks for signs of recovery.

Now, the question is which cruise stock has the best chance for a full recovery? Two cruise stocks attracting investor’s attention are CCL stock and NCLH stock. Carnival is the largest cruise line in the world and although Norwegian is the third largest, it has a much smaller market share. Both companies attract different audiences with Norwegian catering to wealthier passengers and Carnival serving a more international clientele. While both companies have a long way to recovery, their different strategies for survival, current financial health, and passenger numbers could indicate whether CCL stock or NCLH stock is the better long-term investment.

NCLH Stock: The Underdog?
In comparison, Norwegian Cruise Line stock could initially be labeled the underdog in this scenario. Boasting only 15% of the global cruise market, NCLH has 29 ships and is capable of hosting fewer passengers than CCL. For example, the average Norwegian cruise ship carries between 1,900 to 4,100 passengers whereas most Carnival cruise ships carry between 3 and 4 thousand passengers. Despite its smaller size, Norwegian’s expenses have not fallen as much as Carnival’s.

Compared to the same nine month period in 2019, NCLH had 45.8% fewer passengers so far this year. Meanwhile, Norwegian Cruise Line spent 6.7% more on food compared to this same period in 2019. Although, NCLH has noted some moderation of hyperinflation and its impact on food expenses, Carnival’s 28.6% cut in food expenses indicates that these higher expenses are not entirely the result of inflation.

While NCLH’s higher spend and fewer passengers are concerning, the company appears optimistic about its future since it plans to expand its fleet over the next five years. The company spent around $850 million on each of its newest ships which means NCLH could spend $6.8 billion over the next 5 years on 8 new ships.

The company expects an immediate boost to profitability once these ships enter service thanks to a “very favorable and efficient” financing structure which was locked in at the time of contract. As these new ships attract guests new and old, Norwegian believes these additions to its fleet will contribute significantly to top and bottom line financial results. Overall, its decision to expand seems to indicate Norwegian’s intention to capture more of the market in the coming years.

NCLH’s expansion also makes sense since the company reached 100% capacity in May – making it the first of the three big cruise lines to reach full capacity. On top of this, NCLH’s pricing and booking volumes for 2023 are even higher than pre-pandemic levels. While Carnival’s 2023 booking numbers are also expected to exceed pre-pandemic levels, Norwegian’s ability to recover faster so far is likely due to its smaller size and its decision to end all Covid requirements before other cruise line stocks. With this in mind, J.P. Morgan analyst Daniel Adam made Norwegian his top pick for the cruise sector.

Lowering NCLH’s 12 month price target to $30, Adam shared that Norwegian has “outsized growth potential versus peers” thanks to its “smaller, nimbler, and younger fleet with premium pricing”. This hints at Norwegian’s ability to capture a larger market share as demand for cruises increases.

Norwegian may also benefit from a stronger US dollar since it depends on the US market for 78% of its revenue whereas Carnival makes 58% of its revenue from the US and 37% from Europe and Asia. If the US dollar continues to appreciate, those outside the states may cut back on discretionary spending – possibly affecting Carnival’s revenue streams. Despite recessionary concerns in the US, Americans will likely find tickets relatively more affordable than they would be for others.

Although an economic recession would affect the entire cruise industry, NCLH may prove to be more resilient thanks to its subsidiaries – Oceania and Regents – which offer luxury cruises to wealthier customers. As is, NCLH has dominated the higher-end market and the majority of its guests have a net worth of more than $250,000. So far, NCLH has not seen any signs of a pullback from this target audience and in the event of an economic downturn, these consumers’ discretionary spending would be less affected. It also helps explain some of NCLH’s higher expenses which could be attributed to these luxury services.

Comparing revenue from the first nine months of this year with that of 2019, Norwegian’s revenue has dropped 33% while Carnival’s is down 48%. Both cruise lines have experienced roughly the same drop in passengers over this nine month period, but NCLH’s luxury services appear to have resulted in stronger revenue streams. In the first 9 months of this year, Carnival made roughly $1,591 per passenger while Norwegian made $2,989 per passenger. The fact that NCLH is able to make more money per passenger than Carnival with its smaller fleet is a sign that its business model could have what it takes to survive this tough time.

Quarters Revenue Net Income / Net Loss
Q1 2020 $1.2 billion $ (1.8) billion
Q2 2020 $16 million $(715) million
Q3 2020 $6.5 million $(677) million
Q4 2020 $9.5 million $(738) million
Q1 2021 $3.1 million $(770) million
Q2 2021 $4.3 million $(717) million
Q3 2021 $153 million $(858) million
Q4 2021 $487 million $(1.5) billion
Q1 2022 $521 million $(982) million
Q2 2022 $1.1 billion $(509) million
Q3 2022 $1.6 billion $(295) million

However, NCLH still has a long way to go before fully recovering. Like CCL, Norwegian’s revenue fell from $1.2 billion in Q1 2020 to $3.1 million in Q1 2021. Since Q2 2021, its revenue has been increasing at an average rate of 677% QoQ leaving it at $1.6 billion in revenue for Q3 2022. Compared to Q3 2019, NCLH generated just $300 million less.

In terms of profitability, NCLH was able to eke out a gross income of $158 million in Q3 but still generated a net loss of $295 million. Similarly, CCL reported a gross income of $345 million and a net loss of $770 million. This suggests that both companies are approaching profitability but if NCLH continues to generate more revenue per passenger, it has the potential to emerge as the stronger cruise line stock over the long run .

So far passenger numbers have been recovering, but the number of passengers from the first nine months of this year is roughly half of those from the same period in 2019. As Norwegian’s passenger numbers return to pre-pandemic levels – possibly as soon as Q2 2023 – the company’s revenue will also become more robust. Since Norwegian is able to generate almost twice as much per passenger as Carnival, the company will be in a strong position for growth if it is able to maintain its edge over CCL

Quarter Long-Term Debt
Q3 2019 $5.6 billion
Q4 2019 $6 billion
Q1 2020 $8.4 billion
Q2 2020 $10 billion
Q3 2020 $10.4 billion
Q4 2020 $11.6 billion
Q1 2021 $12.1 billion
Q2 2021 $11.9 billion
Q3 2021 $11.8 billion
Q4 2021 $11.5 billion
Q1 2022 $12.5 billion
Q2 2022 $12.2 billion
Q3 2022 $12.8 billion

Setting this aside, NCLH will still need to deal with its long-term debt which ballooned over the course of the pandemic. In Q3 2019, NCLH’s long-term debt amounted to $5.6 billion but quickly increased QoQ to $12.8 billion in Q3 2022. More concerning is its debt-to-equity ratio, which comes in at 46 for Norwegian and only 5 for Carnival. While cruise companies are generally debt heavy due to the nature of their operations, NCLH has a very high debt-to-equity ratio which presents significant risk to investors. However, the way these debts are structured could make them more manageable.

Before the end of the year, $300 million in debt payments will come due and another $1 billion in debt payments will be due in 2023. Currently, Norwegian has $1.2 billion in cash and a $1 billion undrawn commitment. It has also extended the maturities of $1.4 billion of its operating credit facility to January 2025. Its currently working to address the remaining debt associated with the operating credit facility which consists of $875 million senior secured revolving credit facility and senior secured term loan A facility with an outstanding principal amount of $1.5 billion. As is, the operating credit facility is scheduled to mature in January 2024.

However, the company is projected to meet its liquidity needs organically according to NCLH’s management. Its also worth noting that investors have not been diluted significantly over the past year which is a bullish sign for long-term investors. Additionally, Norwegian is planning to grow significantly over the next five years and using borrowed money for healthy growth is not necessarily a bad thing. With demand for 2023 bookings already exceeding that of 2019, it appears that NCLH is in a position for expansion and growth which will help minimize the risks of its long-term debt.

NCLH Stock Forecast
Overall the outlook for Norwegian Cruise Line stock appears promising. The company’s audience is more resilient in the face of an economic downturn, the company has 3 new ships coming on line in 2023 which are expected to boost profitability, and Norwegian’s management expects it will be able to meet its liquidity needs in 2023 as is.

Passenger spending is also up since onboard revenue generation has been breaking records so far. This resulted in 30% higher onboard revenue per passenger cruise day compared to Q3 in 2019. Total revenue per passenger cruise day was also up 14% in Q3, beating the company’s own expectations. So far, customers have been spending on Norwegian’s show excursions, cuisines, and spas as well as at Norwegian’s casino. Because Norwegian Cruise line specializes in offering an enticing, luxury itinerary its no surprise that passenger spending has been correspondingly high.

Another bullish metric has been Norwegian’s booking window. For cruise lines, an elongated booking window is better because it helps the cruise line increase prices sooner while controlling its marketing expenses. While Carnival Cruise has opted for discounts and promotions to bring passengers on board and increase efficiencies that way, Norwegian has employed a market-to-fill strategy which emphasizes the product’s value and maintains price integrity.

While this has led to a smaller load factor in the short term, this appears to be paying off for the company since its net per diem price growth in Q3 was up 5% compared to Q3 2019. Its booking window in Q3 was also 245 days – nearly 10% ahead of the same quarter in 2019. Once its load factors normalize in Q2 2023, NCLH will no longer be sacrificing efficiencies to maintain its price targets.

Another catalyst which may affect the NCLH stock forecast is the ramp up of travel agencies which shifted away from the cruise industry during it’s pause due to Covid-19. Although this catalyst will affect the entire industry, Norwegian is attempting to capitalize on it using a new commissions system for travel agents.

In the past, travel agencies helped bring more passengers to cruises, but many of these agencies shifted towards land vacations while the industry recovered. With the “wave season” starting, NCLH’s management believes that travel agents will help spur an “extraordinary” season for the cruise industry since travel agents have not been able to promote the event over the last 3 years. Norwegian found that paying commissions to travel agents on non-commissionable fares actually increased their business with NCLH so much that the revenue generated over the long-term more than offset the commission. With this in mind, NCLH is exploring ways to offer commissions to travel agents to promote the season. In this case, the next few months leading up to April could be exceptionally strong booking periods for Norwegian.

Right now, NCLH’s focus is returning to full operating capacity which will result in significant cash flow for the company. This will ultimately help NCLH with delevering and derisking its balance sheet moving forward. Norwegian expects its net cruise costs to decrease in 2023 compared to 2022 and its investments in marketing to normalize closer to historical levels on a capacity adjusted basis in 2023.

In general the NCLH stock forecast appears positive since NCLH’s costs are expected to decrease and its load factor is expected to continue ramping up. In Q3 the company achieved 82% load factor and believes that its occupancy rates will continue increasing until reaching historical occupancy rates in Q2 2023.

Because the majority of NCLH’s customers are from North America, it benefits not only from the currency exchange rate but other factors as well. Historically, Norwegian has found that these guests book the earliest, spend the most on board the cruise, and also pay the highest ticket prices. Like Carnival Cruise Lines, NCLH offered future cruise credits to passengers impacted by the pandemic, however the value-add portion of the credits will not carry forward into 2023. This means that revenue per passenger day will not be impacted by future cruise credits in 2023.

As is, NCLH is trying its best to maximize its position post-Covid and is anticipating record net yields and record adjusted EBITDA for the FY 2023 as a result. Looking beyond 2023, NCLH believes it will benefit from its pipeline of new ships since it generates significant cash flows from advanced ticket sales and presale of onboard revenue streams. Typically, this creates a cash infusion of between $100 to $150 million that continues to build over time as final payments for future voyages become due. With 8 ships in the works and 5,000 additional births coming online in 2023, NCLH could ride out the wave of new demand coming in after the pandemic.

NCLH Stock Earnings Forecast
Norwegian Cruise Lines is expected to report its Q4 earnings on February 22nd, 2023. The company’s Q3 earnings surpassed expectations thanks to a $36.5 million beat on revenue and an EPS loss of -$0.64 which was $0.05 less than expected. However, NCLH stock missed expectations for the four quarters before that and will be reporting for a seasonally weaker quarter in Q4.

With this in mind, Q4 estimates are for an EPS loss of -$0.83 and revenue of $1.49 billion. If NCLH achieves its own expectations for Q4, that would be a bullish sign for investors as the company enters the new year. While the company’s booked position for Q4 is still below 2019’s, its pricing is still much higher. In Q3, the company reported positive adjusted EBITDA of approximately $28 million and in Q4 is targeting adjusted free cash flow. Gross pricing is also expected to be 20% higher in Q4 which combined with its expected load factor of 80% or higher, would indicate strong results for NCLH as it prepares for 2023.

Technical Analysis

The current NCLH stock price is $13.67 after the stock ran roughly 63% in anticipation of its Q3 earnings. NCLH stock is currently downtrending and is trading below both the 50 and 200 MA. However, there are several support levels where NCLH could begin consolidating. The stock has a strong support at $11.36 which was tested two times in October. If this support level breaks that would be a bearish sign for Norwegian Cruise Line stock. But if NCLH stock maintains its support at $12.48 that could show investors’ confidence in the company’s ability to recover since it represents a 21% increase from June’s low of $10.33. Past its strong resistance at $18.37, the stock has a weaker resistance at 19.85 which it could easily break past to retest $21.20 or $22.49.

Meanwhile, accumulation has been holding steady since its notable increase from June to September. While investors may not be adding to their positions at the moment, it appears that confidence is returning thanks to NCLH’s improving revenue and passenger numbers. The RSI is oversold at 27 and the MACD is bearish to the downside due to sellers pushing the NCLH stock price down.

Depending on where NCLH stock finds support, bullish investors could find an entry point to take a position ahead of the improving landscape for cruise stocks in 2023. Unlike CCL stock, Wall Street analysts show less consensus on NCLH stock price targets. Many lowered their 12 month price targets in November with most price targets ranging from $14 to $30. UBS Group recently downgraded NCLH stock to $19 while JP Morgan Chase dropped its price target to $30. Credit Suisse Group appears to be the most bearish on NCLH stock having downgraded it to $14 this November. Overall, these price targets suggest a potential upside for Norwegian Cruise Line stock in 2023 although the stock is generally not expected to break past its early 2022’s highs.

Which of the Cruise Stocks Will Rule the Waves?

On the bright side, the cruise industry as a whole shows considerable upside potential. There are many unserved and underserved markets which cruise lines could tap into in the future. Especially in comparison to the options for land based vacations, the cruise industry has a lot of room for expansion. Additionally, many tourist destinations have removed COVID testing requirements for entry and many countries in Asia have begun reopening to cruise lines. These catalysts will help increase demand for cruises in the near term.

Spending on cruises is also showing an uptick as Bank of America reported monthly core cruise spending was up 18.6% in November compared to 2019. This was a huge step up from the months before when growth was either declining or in the single digits compared to pre-pandemic levels. With wave season coming up, it appears that cruise stocks could be a worthwhile investment. However, when comparing Carnival cruise stock to Norwegian Cruise Line stock there is no easy winner.

CCL appears more hampered by its debts than NCLH and is believed to be discounting fares heavily to sell cruise trips. Amidst inflation and rising fuel costs this strategy has made it more difficult for CCL to earn a profit. On top of this, Carnival has an aging fleet and will be negatively affected by its decision to sell ships during the pandemic once demand fully recovers. Updating its fleet will also contribute to its future expenses.

Carnival currently has $35.3 billion in debt which cost $1.6 billion in interest payments last year. Considering that interest rates have been increasing since then, future interest payments will likely be even higher. Although analysts expect CCL to make enough in pre-tax profits in 2023 to pay off the costs of its debt while still making a profit, there is very little room for error.

Considering that quantitative tightening may hurt demand for cruises as consumers monitor their spending, CCL could run into issues down the line since a large part of its audience is from outside the United States. On top of this, the effects of discounting its tickets to attract more passengers could also lead to repercussions in 2023. These promotions and future cruise credits resulted in its Q4 cumulative advanced book position coming in below historical levels.

While CCL does have two ships on order in 2024 and one in 2025, it does not plan to expand its fleet as aggressively as NCLH. Considering Norwegian’s younger fleet, higher revenue per passenger, and dominance in the high-end market, NCLH stock could yield higher returns in 2023. NCLH is already one of the fastest growing cruise stocks in terms of sales growth and has held up stronger in the face of this market downturn then CCL stock.

Investors should watch NCLH and CCL’s passenger numbers in the coming quarters since this will signal a return to historical load factors. If Norwegian is able to attract more passengers than it was historically capable of while also generating more revenue per passenger than CCL, it could be a sign that NCLH stock is on track to a profitable post-pandemic recovery.

Quarter CCL Passengers NCLH Passengers
Q1 2019 2,937,000 645,052
Q2 2019 3,101,000 682,935
Q3 2019 3,752,000 726,921
Q4 2019 3,076,000 640,804
Q1 2020 3,063,000 499,729
Q2 2020 426,000 N/A
Q3 2020 N/A N/A
Q4 2020 N/A N/A
Q1 2021 5,000 N/A
Q2 2021 27,000 N/A
Q3 2021 340,000 57,931
Q4 2021 851,000 174,517
Q1 2022 1,011,000 191,150
Q2 2022 1,652,000 393,943
Q3 2022 2,571,000 526,838

In an interview with Yahoo Finance, Norwegian Cruise Line’s CFO – Mark Kempa – shared that “ we firmly believe, given our trajectory today, that with our existing cash on hand and our expected organic cash flow, we are going to be able to pay off our debt in the normal course of business by just good old-fashioned earnings and cash generation.”

This is a bullish outlook considering that over the next two to three years NCLH will need to pay off roughly $1 billion per year in debt. With $12.8 billion in long-term debt, the road ahead presents some risk but Kempa emphasized that Norwegian’s BOD had no intention to dilute shareholders in order to pay down debt or to delever. In light of NCLH’s opportunity to expand, its strategy for maintaining price integrity, and its ability to attract wealthier passengers, NCLH stock appears less risky than other cruise stocks.