Company Reports

We don’t plan any material change to our $29 fair value estimate for narrow-moat Norwegian Cruise Line Holdings after incorporating first-quarter results and increasing our net revenue yield outlook for 2024. Shares traded down more than 10% after earnings, which we believe was a result of Norwegian maintaining its full-year cost forecast despite better-than-expected expenses in the first quarter. We view Norwegian’s cost outlook as pragmatic, given still-high commodity costs (fuel, food) and uncertain geopolitical environments that can disrupt equilibrium in the expense structure. Even when including a 325-basis-point headwind Norwegian faces in 2024 for an increase in dry-dock days, 2024 costs excluding fuel have risen at a 3% CAGR relative to 2019, implying that cost management has been solid. Shares look undervalued.

Coronavirus-induced changes in consumer behavior with regard to travel had altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents. However, as consumers returned to cruising after the 15-month sailing halt that ended in July 2021, they regained their appetite for travel, bolstered by the value proposition the holiday provides. With ships fully deployed at historical occupancy levels, pricing surpassed prepandemic levels in 2023, and pricing momentum has persisted into 2024. While Norwegian could intermittently see pricing competition in periods of macroeconomic distress, we believe its freestyle offering and attractive itineraries will keep passengers engaged with the brand. On the cost side, while higher oil prices and unfavorable foreign exchange could elevate costs at times, we expect management will focus on extracting further efficiencies as the business continues to scale. Over time, we expect both pricing and costs to normalize at low-single-digit rates.

Narrow-moat Norwegian’s results displayed the strong sentiment of its consumers, with 2024 bookings and pricing at higher levels than 2023 for all quarters and with the firm currently at a record booked position. The appetite for travel has failed to slow, with Norwegian posting as-reported yield growth of 8.2% in its fourth quarter even while absorbing 17% higher capacity versus 2019. Investors sent shares up at a double-digit clip on the firm’s initial 2024 outlook, which called for as-reported net yield growth of 5.5% and net cruise costs, excluding fuel, up 3.5%, despite facing a 325-basis-point headwind for higher drydock expenses this year. This implies 2024 net yields per available passenger cruise day of around $283, an impressive rate considering the level is more than 10% higher than the daily rate narrow-moat Royal Caribbean is set to print on its recently lifted outlook. The net cruise cost forecast (excluding fuel) of $159 per passenger cruise day implies an average annual cost increase of 3% since 2019, lower than the average annual inflation rate of 4.3% over the same period. Both per diem yields and costs ex-fuel were slightly better than our 4% growth and $161 respective estimates, and as such we plan to raise our $27 fair value estimate by a mid-single-digit rate. We view shares as attractive given a wide margin of safety.

Changes to consumer behavior surrounding travel as a result of the coronavirus had altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents. However, as consumers returned to cruising after the 15-month sailing halt that ended in July 2021, passengers regained their appetite for travel relentlessly, bolstered by the value proposition the holiday provides. With ships now fully deployed at historical occupancy levels, pricing has been restored and is set to surpass prepandemic levels in 2023. While Norwegian could intermittently see pricing competition depending on the macroeconomic environment, we believe its freestyle offering and attractive itineraries will keep passengers engaged with the brand. On the cost side, while higher oil prices and unfavorable foreign exchange could keep costs elevated at times, we expect management will focus on extracting further efficiencies as the business continues to scale. Over time, we expect both pricing and costs to normalize at low-single-digit rates.

We are reinstating our narrow moat ratings for Carnival, Royal Caribbean, and Norwegian after taking away the moat designation at the onset of the COVID-19 pandemic. We think the cruise firms capture an economic moat stemming from three sources, including efficient scale, brand intangible asset, and cost advantage. Underlying these sources are factors including barriers to entry, pricing power, and scale advantages that bolster the cruise lines competitive edge. We now forecast ROICs that are even better than the pre-COVID-19 period over our outlook, reaching 18% at Carnival, 17% at Royal, and 13% at Royal at the end of our 10-year forecast versus sub-10% in 2019 (when the firm last held a narrow moat rating) and our 10% weighted average cost of capital estimate.

Changes to consumer behavior surrounding travel as a result of the coronavirus had altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents. As consumers returned to cruising after the 15-month sailing halt that ended in July 2021, cruise operators added COVID-19-related protocols, which proved successful (as evidenced by lower positivity rates than on land) to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. However, with ships now fully deployed at normal occupancy levels, pricing has been restored, set to surpass prepandemic levels in 2023. Still, Norwegian could intermittently see pricing competition as global supply shifts to focus disproportionately on the North American consumer, containing yield upside. On the cost side, higher oil prices and unfavorable foreign exhange could keep costs elevated in 2023. However, we expect both pricing and costs to normalize over time, rising at a low-single-digit rate longer term.

Given impacts from both wildfires in Hawaii and the Israel-Hamas war, certain pockets of sailings have hindered no-moat Norwegian’s near-term potential. While the wildfires in Maui are extinguished, allowing for the resumption of the Pride of Hawaii’s year-round interisland itineraries, the duration of Middle East geopolitical instability is unknown. This explicitly impacted fourth-quarter occupancy levels as cancellations have accelerated and a more hesitant cadence of bookings have ensued for the region. In our model, this trend will surface in our fourth-quarter forecast through lower occupancy (98% versus 102% prior) and lower as-reported net revenue yield growth due to weaker close in bookings (up 8% versus up 12% prior), which will result in around a $0.14 EPS loss, versus just above our breakeven forecast prior. Moreover, costs are likely to run higher than our initial 3% increase excluding fuel in 2024, with Norwegian undertaking 170 dry dock days, which will provide a 300-basis-point (or $4 on a unit cost basis) headwind.

Changes to consumer behavior surrounding travel as a result of the coronavirus have altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents. As consumers returned to cruising after the 15-month sailing halt that ended in July 2021, cruise operators added COVID-19-related protocols, which proved successful (as evidenced by lower positivity rates than on land) to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. However, with ships now fully deployed at normal occupancy levels, pricing has been restored, set to surpass prepandemic levels in 2023. Still, Norwegian could intermittently see pricing competition as global supply shifts to focus disproportionately on the North American consumer, containing yield upside. On the cost side, higher oil prices and unfavorable foreign exhange could keep costs elevated in 2023. However, we expect both pricing and costs to normalize over time, rising at a low-single-digit rate longer term.

We plan to lower our $27 fair value estimate for no-moat Norwegian by a low-single-digit rate after adding its modest second-quarter outperformance and updated EPS outlook into our model. In the second quarter, as-reported net yield growth of 2.4% (versus 2019’s level) was 30 basis points below our forecast, while net cruise costs excluding fuel per diem were $156, $3 ahead of guidance and our estimate. This led to quarterly adjusted EPS of $0.30, $0.05 ahead of prior guidance, which was the raise in the firm’s full year EPS outlook—to $0.80, from $0.75. Full-year demand commentary did not disappoint; the advance ticket sales balance rose to $3.5 billion, an all-time high and $167 million higher than last quarter, and the second half of 2023 is booked ahead of 2019’s level at higher prices.

Changes to consumer behavior surrounding travel as a result of the coronavirus have altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents until the end of the current decade. As consumers returned to cruising after the 15-month sailing halt that ended in July 2021, cruise operators added COVID-19-related protocols, which proved successful (as evidenced by lower positivity rates than on land) to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. Still, we expect Norwegian could intermittently see pricing competition as global supply shifts to focus disproportionately on the North American consumer, containing yield upside. On the cost side, inflated spending on the procurement of goods and higher oil prices could keep costs elevated in 2023. However, we expect both pricing and costs to normalize over time, rising at a low-single-digit rate longer term.

We don’t plan any material change to our $27 fair value estimate for no-moat Norwegian Cruise Line after digesting first-quarter results. Sales of $1.8 billion and an adjusted EPS loss of $0.30 bested our respective $1.7 billion and $0.44 loss estimates, due to as-reported yields (pricing) that ticked up 3% and well-controlled costs. Indeed, with the firm’s current 2023 net yield outlook calling for as-reported growth of 4.5%-6%, the second half should see roughly 7% pricing growth over 2019 levels. Demand momentum has persisted, with 2023 bookings and pricing at record levels, pointing to consumers' appetite to travel. With advance ticket sales jumping 26% sequentially, to $3.4 billion, we see promising implications for the summer sailing season.

We plan to maintain our $27 fair value estimate and Standard capital allocating rating after digesting no-moat Norwegian Cruise Line Holdings' CEO transition news. Our rating is bound by limited flexibility on Norwegian's balance sheet—given its high revenue cyclicality and operating leverage—despite fair investment records and appropriate cash distributions. We continue to expect debt paydown to take precedence for use of excess cash in the near term. Shares trade at a 54% discount to our valuation, offering a buying opportunity for investors willing to withstand the associated volatility. We think the current macro uncertainty obscures Norwegian's progress toward profitability and solid booking position, with pricing slated to improve in fiscal 2023.

Changes to consumer behavior surrounding travel as a result of the coronavirus have altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents until at least 2027. As consumers returned to cruising after the 15-month sailing halt that ended in July 2021, cruise operators added COVID-19-related protocols, which proved successful (as evidenced by lower positivity rates than on land) to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. Still, we expect Norwegian could intermittently see pricing competition as global supply shifts to focus disproportionately on the North American consumer, containing yield upside. On the cost side, inflated spending on the procurement of goods and higher oil prices could keep costs elevated in 2023. However, we expect both pricing and costs to normalize over time, rising at a low-single-digit rate longer term.

We don’t plan any material change to our $28 per share fair value estimate for no-moat Norwegian Cruise Line Holdings after updating our 2023 outlook and view shares as undervalued. Fourth-quarter results displayed continued progress toward profitability, although less than expected (EPS loss of $1.04 versus a FactSet consensus loss of around $0.90), leading to a second-half total that failed to deliver above breakeven EBITDA. We think that both this shortfall, as well as a lower-than-expected EPS outlook for 2023 ($0.70 versus our forecast for more than $1.00) have been the key instigators driving the post-print share price lower by about 10%.

In an effort to address an evolving liquidity situation, no-moat Norwegian announced on Jan. 19 its intention to execute a private placement of $500 million to repay part of its term loan and credit facility (which will also extend its maturity date to 2025, from 2024). This move, along with $1 billion in cash and $1 billion in undrawn liquidity will help alleviate near-term cash concerns. Still, at last print, Norwegian has around $900 million in ship-related debt due in 2023 and $1.6 billion in amortizing loans scheduled to mature in 2024 (excluding the term loan and revolver), so continued flawless execution is paramount.

Changes to consumer behavior surrounding travel as a result of the coronavirus have altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents over an extended horizon. As consumers returned to cruising after the 15-month sailing halt that ended in July 2021, cruise operators added COVID-19-related protocols, which have proven successful (as evidenced by lower positivity rates than on land) to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. Still, we expect Norwegian could intermittently see pricing competition as global supply shifts to focus disproportionately on the North American consumer, limiting near-term yield upside (also impacted by the redemption of future cruise credits through December 2022). On the cost side, inflated spending on the procurement of goods and higher oil prices could keep costs elevated in 2023. However, we expect both pricing and costs to normalize over time, rising at a low-single-digit rate longer term.

We don’t plan any material change to our $28 fair value estimate for no-moat Norwegian in light of third-quarter earnings as demand for travel remains unrelenting. We continue to view shares as undervalued.

Despite enduring travel demand into the fall of 2022 and our view that it can continue into 2023, investor concerns around future trips and credit availability have grounded share price performance across the industry. As a result, we see meaningful opportunities to book investment stays in Sabre, Accor, Booking Holdings, and Norwegian, which trade at 64%, 42%, 44%, and 54% discounts to our $15, EUR 37.50, $2,900, and $28 fair value estimates, respectively.

We don’t plan any change to our $28 fair value for no-moat Norwegian Cruise Lines after absorbing its investor meeting update and view shares as significantly undervalued. In fact, after lapping the slower return to profitability that no-moat Carnival reported last week (the firm generated around $300 million in EBITDA in its third quarter versus $2.4 billion in third-quarter 2019), we are more constructive on Norwegian shares given management’s rhetoric. Not only are bookings in line with 2019 levels (at 245 days before sail) with pricing “meaningfully higher,” but EBITDA is also slated to reach record levels in 2023 (a promise Carnival couldn’t confirm). A unique positioning offers Norwegian the ability to keep its price leadership position in the cruise industry, thanks to robust capacity growth (with premium pricing on new hardware), rich cabin mix (60% balconies), greater quantity of upscale berths (nearly 3 times Royal Caribbean), and a disciplined market-to-fill strategy (rather than discount). Additionally, with future cruise credits stemming from COVID-19 cancellations expiring in December 2022, next year’s pricing should be liberated from any drag from relocated bookings.

Trading at a nearly 60% discount to our $28 fair value estimate, we view no-moat Norwegian’s shares as attractive. While no-moat peers Carnival and Royal Caribbean also trade significantly under their $24 and $80 respective intrinsic values, we deem Norwegian as best positioned to capitalize on a robust opportunity set relative to its main competitors. Indeed, not only is Norwegian set for faster capacity growth, positioning it for premium pricing gains on new hardware, but it also benefits from other idiosyncratic factors. To start, it has a higher percentage of travelers sourced from North America, where bookings tend to occur earlier relative to the sail date, potentially driving lower demand for close-in discounting. Further, the firm has less exposure to low-income consumers, as it caters to those that can more easily digest stable or higher prices even during volatile economic environments. And we think Norwegian is the most dedicated of its peers to the market-to-fill strategy, a revenue management tactic that optimizes bookings.