Norwegian Cruise Line Earnings: Cruise Demand Stays Afloat Despite Macroeconomic Waves

We don’t plan any material change to our $27 fair value estimate for no-moat Norwegian Cruise Line NCLH 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.

Aside from solid pricing, costs continue to moderate. The first quarter posted a 14% sequential decline in net cruise costs excluding fuel. If declines over the rest of 2023 flatten, it would reflect less than a 5% average annual increase in costs since 2019, a rise we don’t view as unreasonable given multiple years of above average inflation and two upscale ships coming online in 2023 (with higher costs). In 2024, we expect costs to continue to rise again at a low-single-digit rate, as Norwegian mitigates cost growth through firmwide cost savings initiatives.

In our opinion, shares have remained undervalued as concern around the general economic environment has led investors to assess discretionary businesses more cautiously. However, we think shares remain attractive given the firm’s progress since its restart. Not only is it set for its first profitable quarter in the second quarter since 2019, but a return to positive free cash flow in 2024 (with no ship deliveries) should offer confidence that Norwegian can better manage its debt load ahead. Furthermore, we have no reason to believe the long-term fundamentals have changed, and as such, we continue to model 3% yield and 1%-2% cost growth annually over time.