It's been a comeback story for Norwegian Cruise Line Holdings (NCLH 0.80%). After facing near-extinction in the depths of the COVID-19 pandemic, the recovery of Norwegian, along with other cruise line stocks, accelerated in the past last year. Norwegian has taken advantage of pent-up travel demand, continued economic growth, and fleet upgrades to not only survive, but thrive, hitting all-time booking records in recent quarters. Shares of the company's stock rose early in the year, buoyed by economic optimism. In recent months, however, the shares are down nearly 20% from their 52-week highs, making this a great time to assess Norwegian for long-term value.
Norwegian's breakthrough 2023
Norwegian's full-year 2023 earnings were stellar, with revenue up more than 30% from 2019 -- the last full year before the pandemic lockdowns. While such an increase over four years may not seem impressive, for a cruise operator like Norwegian, this represents not only a return to full strength, but solid growth beyond the last "normal" year before the pandemic. Remember that cruising came to a total halt for 15 months, so Norwegian was without revenue for more than a full year. And, of course, when cruising opened up again, it was only a slow trickle at first. To grow revenue by 32% after a catastrophe like the pandemic is worth celebrating.
2024 is set to be a record year
Norwegian reported excellent financial results for the first quarter of its 2024 fiscal year, beating previously issued projections across a range of key performance metrics. First quarter revenue rose 20% to $2.2 billion, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) almost doubled while adjusted earnings per share (EPS) rose 116%.
Norwegian reported record first-quarter bookings, which contributed to a record booked position for the full year. The company made improvements to its debt situation, and also raised its outlook for full year 2024 net yield (a measure of operational efficiency), adjusted EBITDA, and adjusted EPS. Norwegian now expects adjusted EPS of $1.32 for 2024. Clearly, Norwegian is attracting customers and satisfying their expectations, which is financially rewarding for the company.
A look at Norwegian's financial results and current share price, which is down roughly 20% from its 52-week high, suggests that the shares are currently fairly valued.
| Price-to-Earnings Ratio | Price-to-Adjusted-Free Cash-Flow Ratio | Price-to-Book Value |
|---|---|---|
| 24.5 | 6.4 | 20.3 |
Data sources: Norwegian and Y Charts.
Price-to-adjusted free cash flow, which is the current market price of the stock divided by adjusted free cash flow, which the company calculates by including certain proceeds from the financing of its ships, is attractively low. The price-to-earnings ratio reflects an average to above average valuation, even after the recent decline in share price. But Norwegian's price-to-book value per share is well above anything that might be considered value territory. This inflated figure is the result of a debt-heavy balance sheet, which is the chief concern for Norwegian.
Should you buy Norwegian shares now?
There is much to admire and celebrate about Norwegian's recovery, and reason to be optimistic for the future. However, the company's debt is clearly a drag on operations. The company's debt-to-equity ratio of 46.7 represents a huge burden. It also indicates a razor-thin margin of safety; Norwegian paid over $720 million in interest expense for 2023. It is true that the company has restructured some of its debt this year, which will result in reduced interest expense in the future. However, while any improvement is beneficial, the heavy debt load and interest costs eat into profit and will be a major burden if the economy cools and consumers pull back on cruising. The risk inherent in Norwegian's debt levels will likely turn off value-oriented investors.
Given the level of Norwegian's debt, purchasing shares at discounted prices is important, in order to adequately reward investors for taking on the greater risk. While the shares are down this year, they are not sufficiently low to offer attractive value for investors. For those looking for exposure to cruise line operators, Carnival Cruise Lines looks more attractive on a price-to-cash-flow, price-to-book-value, and debt-to-equity basis. Norwegian has produced an amazing turnaround and it is well positioned to capitalize on a record-setting year in 2024. However, investors should wait for a further pullback in share prices, or more progress on debt reduction, before adding any shares.
