When it comes to cruise line stocks it seems as if Norwegian Cruise Line (NCLH 0.80%) is the Rodney Dangerfield of the shipyard. It can't seem to get any respect. The shares are trading just 9% higher over the past year, compared to larger rivals Carnival Corp. and Royal Caribbean Cruises rising 31% and 75%, respectively, in that time.
The disparity gets even wider between the leader and bleeder if we take a longer view. Royal Caribbean shares are up 56% over the past three years. Norwegian has been nearly cut in half.
There's still a lot to like in the laggard. Norwegian Cruise Line has its flaws, but it's also trading a lot cheaper than its competitors. If you believe that the rising tide in popularity for the cruising business will lift all fleets, it's time to consider the bargain that Norwegian offers for investors given the lofty valuations found elsewhere.
Coasting in the sun's direction
All three of the major cruise line operators suffered tremendous hardship when the COVID-19 outbreak shuttered operations four years ago. They have all recovered. All three cruise line stocks checked in with record bookings and customer deposits in their latest quarters, so the near-term outlook for the industry has never been more lucrative.
Passengers are back, and they're willing to pay more for their water adventures than they were before the pandemic. This is great news for all operators, but investors seem to be only chasing the two largest players. The irony here is that Carnival and Royal Caribbean aren't necessarily expensive stocks. Norwegian is just that much cheaper. Let's check out the P/E ratios based on what analysts see the three players earning this year and in 2025.
| Company | 2024 P/E | 2025 P/E |
|---|---|---|
| Carnival | 16 | 11 |
| Royal Caribbean | 14 | 12 |
| Norwegian Cruise Line | 12 | 9 |
Data source: Yahoo! Finance.
The valuations for the entire industry are pretty compelling. All three of the leading seafarers are trading at forward earnings multiples of 16 or less, dropping to the pre-teens or less if you look out to next year. Norwegian is just fetching a much lower ratio. The valuation gets even more tempting if you look out to 2026.
Norwegian hosted its 2024 Investor Day two weeks ago. It was a strong presentation. The cruise line operator boosted the guidance it had issued just three weeks earlier in a poorly received quarterly report. It cleaned up nicely for its investor presentation, and it also turned heads by initiating guidance for 2026. The company hopes to score an adjusted profit of $2.45 a share in two years. Pull up a stock quote today, and you are buying the cruise line for just 7 times what it's hoping to earn in 2026.
Image source: Getty Images.
It's not always a pleasure cruise
Cruise line operators had to take on gobs of new debt and issue new shares in 2020 and 2021 when they were unable to fully operate their ships. One can argue that the multiples are low because the enterprise values are much higher than the debt-saddled market cap. It's a fair knock. Norwegian's market cap of $7.4 billion is a tiny raft compared to its $21.2 billion enterprise value. The 2026 P/E ratio of 7 expands to 20 if you switch out the market cap numerator with Norwegian's enterprise value.
It does get better. Now that the cruise line operators are profitable on a trailing basis with large sums of free cash flow expected in the future, Norwegian and its larger peers should be able to pay down their chunky debt loads back to historic levels. It wouldn't be a surprise if Norwegian's balance sheet is a lot cleaner in a couple of years.
It's easy to dismiss the distant bronze medalist. Carnival is the top dog, cashing in on the scalability that comes with being the industry leader as the mass market player. Royal Caribbean has historically been the operator with the best margins and growth prospects, explaining why it has outperformed both Carnival and Norwegian in the past.
Investors still shouldn't sleep on Norwegian Cruise Line. Its outlook continues to strengthen with every passing quarter. Analysts continue to inch their profit targets higher, and that should remain the case based on the buoyant state of booked reservations for the balance of this year and into 2025. Buying the basket of industry stocks is a smart way to play the recovery of the cruise line operators, but don't dismiss Norwegian as the forgotten port bargain.
