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Coverage Initiation: Norwegian Cruise Line Holdings
Value Line has initiated coverage of Norwegian Cruise Line Holdings (NCLH) in its flagship product, The Value Line Investment Survey. Norwegian is one of the largest cruise ship operators, with 13 vessels. The company is incorporated in Bermuda and has its corporate headquarters in Miami.
Norwegian Cruise Line began operations in Miami in 1966. In February of 2000, Genting HK acquired control of the company. In January of 2008, Apollo Investment (AINV) acquired a 37.5% stake from Genting, and the TPG Viking Funds acquired a 12.5% stake. The company had its initial public offering on NASDAQ on January 24, 2013. Following a secondary offering by principal shareholders in December of 2013 (in which Norwegian Cruise Line did not receive any of the proceeds), the three largest holders now own about 63% of the company among them. The stock performed well in its first 12 months as a public company, rising about 30%, albeit in a strong market.
All of Norwegian Cruise Line’s vessels are designed to provide “Freestyle Cruising” to its passengers. This offers more flexibility in dining and entertainment, and also gives the company more opportunities to increase onboard revenue from casinos, beverages, specialty dining, gift shops, and spas. This is important, as sources other than its ticket sales make up 30% of its total net yield. Norwegian Cruise Line has homeports that are close to major population centers, such as New York, Boston, and Miami. The average age of the company’s fleet is lower than that of its larger competitors, Carnival (CCL) and Royal Caribbean (RCL). Management believes that this provides Norwegian Cruise Line with a competitive advantage.
Norwegian Cruise Line enhances its organic growth by adding ships. The company took delivery of its 13th ship, on January 10, 2014. Its 14th and 15th ships are scheduled for delivery in the fall of 2015 and the spring of 2017, for a combined cost of €1.4 billion. Each vessel has the capacity for 4,200 passengers. The company has also entered into partnerships with sports teams and entertainers such as the Blue Man Group and the Radio City Music Hall Rockettes
The cruise operator faces several risk factors. The state of the economy clearly has an effect on customer demand. If the company decides to cancel a shipbuilding contract, this could force it to take a sizable impairment charge, as it did in 2008. Fuel prices are another concern, as this cost accounted for 19.2% of total cruise operating expense in 2012. Moreover, there have been some well-publicized problems on competitors’ ships in recent years, which hurts Norwegian if it discourages people from taking a cruise with any company. An outbreak of illness on a Royal Caribbean ship in January of 2014 is the most recent example. Any increase in industrywide cruise capacity, which heightens competition, is another cause for concern.
The balance sheet is highly leveraged. As of September 30, 2013, long-term debt made up more than half of the company’s total capitalization. In fact, earnings in the first nine months of 2013 declined materially due to a sharp rise in interest expense. Norwegian Cruise Line has exposure to currency fluctuations, too. Finally, income-oriented investors should note that the company pays no dividend and has no intention of initiating one.
For a more thorough look at Norwegian Cruise Line, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have a position in any of the stocks mentioned.