Undervalued by 40%, This Stock Is a Buy After Earnings

Norwegian Cruise Line Holdings NCLH currently trades about 70% below its prepandemic highs. But we think there’s a lot to like about the stock. Consumer appetite for travel remains resilient, translating into strong pricing that let the company lift its 2024 as-reported net yield outlook to 7.2% from 6.4%. Cost management has been solid this year, too. The shares look like a bargain, trading 40% below our fair value estimate. Morningstar chief US market strategist Dave Sekera includes Norwegian among his stocks to buy in June.

With pandemic-related changes in travel in the rearview mirror, Norwegian Cruise Line Holdings is on the path to generating excess economic rents. Consumers returned to cruising after the 15-month sailing halt that ended in July 2021, attracted by the value proposition the holiday provides, an interest that persists. With ships fully deployed, pricing surpassed prepandemic levels in 2023 and continues to show momentum in 2024. While Norwegian could see pricing competition in periods of macroeconomic distress, we believe its attractive itineraries, tactical revenue management, and data-driven marketing will keep elevating sales. 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.

Key Morningstar Metrics for Norwegian

• Fair Value Estimate: $30
• Star Rating: 4 Stars
• Economic Moat Rating: Narrow
• Uncertainty Rating: Very High

Economic Moat Rating

We rescinded Norwegian’s economic moat entitlement at the beginning of the covid-19 pandemic because of the lack of visibility on the extent of lockdowns and the corresponding effect on returns on invested capital. But we returned our moat rating to narrow in January 2024, given our confidence in the company’s ability to generate excess returns again. We now expect ROICs will surpass pre-covid levels over our forecast period, reaching more than 13% in 2033 versus our 10% weighted average cost of capital estimate. We see Norwegian’s moat arising from three sources: (1) efficient scale, thanks to the cost of ships and a relatively high-fixed-cost business model, (2) brand intangible asset, primarily demonstrated by pricing power, industry concentration, and risk aversion that educates purchasing decisions, and (3) cost advantage, benefiting from proximity, buying power, and low-cost financing.

Read more about Norwegian’s moat rating.

Fair Value Estimate for Norwegian Stock

After making minor adjustments to our model in response to Norwegian’s May investor day, our fair value estimate remains at $30 per share. Healthy demand exiting the wave season translated into strong pricing that let the company lift its 2024 as-reported net yield outlook to 7.2% from 6.4%. With the 2024 cost outlook unchanged, higher pricing falls to the bottom line, with Norwegian now expecting 2024 adjusted earnings per share of $1.42. For 2026, Norwegian plans for EPS of $2.45, operational EBITDA margin of 39%, and net leverage at a mid-4 times level. We have bumped our 2026 EPS forecast to $2.39 (which could vary on share count) and operational EBITDA to above 35%, bound by the uncertainty of consumer behavior and commodity prices. Our other long-term estimates are unchanged.

Read more about Norwegian’s fair value estimate.

Risk and Uncertainty

Norwegian faces risks that include geopolitical uncertainty, commodity price volatility, and changes to the US tax code, as well as company-specific issues. In recent years, the company saw headline risk surrounding covid-19, which affected its ability to stimulate consistent near-term demand. If another outbreak occurs, hardware could again operate at lower occupancy levels, hindering profits. Risks to pricing power exist, as the media have clung to negative publicity in prior years. Norwegian also faces product risk, with regard to the potential for viral outbreaks, as well as regulation around pollution.

Read more about Norwegian’s risk and uncertainty.

Norwegian Bulls Say

• Because Norwegian is smaller than its North American cruise peers, it can deploy its assets nimbly as demand rises, allowing for strategic pricing tactics.
• If consumer preference for experiences over things persists, yields could increase faster than we currently expect as demand rises.
• Norwegian has capitalized on leisure industry knowledge from its prior sponsors as well as the inclusion of the high-end Regent Seven Seas and Oceania brands, sharing best practices across brands.

Norwegian Bears Say

• Weakness in consumer spending spurred by an economic downturn could affect discretionary outlays, leading softening pricing and lower onboard spending.
• A lack of credit availability could prevent inexpensive financing of new ship builds, slowing capacity growth, if export credit facility incentives wane.
• Persistently higher fuel prices could hinder the cost structure to a greater degree than we forecast, given that only 55% of Norwegian’s remaining 2024 fuel costs are hedged.

This article was compiled by Susan Dziubinski and Sylvia Hauser.