Shares of Miami, Fla.-based cruise operator Norwegian Cruise Line Holdings Ltd. (NCLH) have slumped 23.8% in price over the past year and 21.2% year-to-date. The stock is currently trading below its 50-day and 200-day moving averages. The cruise line company was hit hard by the COVID-19 pandemic, losing billions of dollars as ships were anchored in ports due to travel restrictions and other public health mandates.
Cruise line stocks, including NCLH, declined last week over concerns regarding the potential impact of the COVID-19 omicron variant on the global economy. Investors grappled with fears concerning a travel pullback as governments again restrict travel and tighten testing requirements. However, NCLH stock bounced back in its last trading session, gaining 9.5% in price intraday to close at $20.03. The rally was fueled by news regarding the possibility that the new COVID-19 variant might cause milder symptoms than previous COVID-19 strains. However, the World Health Organization warned that it is too early to understand the severity of the variant. “There was initial reports that it tended to be more mild, but it’s really too soon,” said Maria Van Kerkhove, WHO's technical lead on COVID-19.
Previously, NCLH expected to return to profitability in the second half of 2022, because pent-up demand for leisure travel and the vaccination program were helping the cruise line operators recover from the pandemic. However, if the omicron variant drives another COVID-19 wave or current vaccines turn out to be less effective against the strain, it could take longer for NCLH to reverse its losses and improve its margins.
Here is what could shape NCLH’s performance in the near term:
Lofty Valuation
In terms of forward EV/Sales, NCLH is currently trading at 25.76x, which is 1,729.7% higher than the 1.41x industry average. Also, its 11.44 forward Price/Sales ratio is 865.3% higher than the 1.19 industry average.
Weak Bottom Line
NCLH’s total revenues increased 2,248.6% year-over-year to $153.08 million in its fiscal third quarter, ended September 30. However, its revenues missed the $174.91 million consensus estimate by 12.5%. NCLH’s operating loss stood at $689.11 million, up 33.1% from the same period last year. Its net loss grew 24.9% from its year-ago value to $845.89 million. The company’s adjusted loss per share came in at $2.17 versus a $2.09 consensus estimate. Also, its trailing-12-months net operating cash flow and levered cash flow were negative $2.79 billion and $2.18 billion, respectively.
Analysts expect the company’s revenues to decline 43% year-over-year in the current year, while its EPS is expected to remain negative.
POWR Ratings Reflect This Bleak Prospects
NCLH has an overall F rating, which translates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a D grade for Quality. This is justified because the company’s negative 105.37% and 19.61% respective ROE and ROA compare with the 17.23% and 5.94% industry averages.
NCLH has an F grade for Value, in sync with its lofty valuation.
Of the four stocks in the F-rated Travel – Cruises industry, NCLH is ranked #3.
Beyond what I have stated above, one can also view NCLH’s grades for Sentiment, Growth, Momentum, and Stability here.
Bottom Line
The cruise line industry has been gradually clawing back from the impact of the COVID-19 pandemic. NCLH had targeted a reverse in its losses and a return to profitability by the end of 2022, which now seems a long shot because the new COVID-19 variant could lead to a renewal of travel bans and lockdowns. Furthermore, the stock looks overvalued at its current price level. NCLH has a 2.70 beta, indicating high volatility. Also, considering the company’s negative ROE and EPS, we think the stock is best avoided now.
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NCLH shares rose $0.95 (+4.74%) in premarket trading Tuesday. Year-to-date, NCLH has declined -17.70%, versus a 25.56% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.
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