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Here's Why You Should Hold on to Norwegian Cruise (NCLH) Stock

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Norwegian Cruise’s (NCLH - Free Report) strong demand and booking volume growth bode well. Also, gradual resumption of fleet operation and fleet-expansion efforts are helping the company gain traction. In the past year, shares of Norwegian Cruise have gained 64%, almost in line with the Zacks Leisure and Recreation Services industry’s 64.1% rise.

However, business uncertainties and significant cash burn related to the pandemic remain potential concerns.

Factors Driving Growth

Sail Panel to Counter Current Crisis

The cruise industry has been driven to a standstill by the coronavirus-induced crisis. However, the pandemic has compelled companies to forget rivalries and come together to counter the scenario. Case in point, Royal Caribbean Cruises and Norwegian Cruise have teamed up to develop safety standards. Former Utah Governor Mike Leavitt and former FDA Commissioner Scott Gottlieb are serving as co-chairs of a newly formed group of experts called the "Healthy Sail Panel."

During the third-quarter 2020 conference call, the company announced that its team along with healthy sale panel has worked to produce a health protocol to resume operations. The panel has made 74 specific recommendations that help reduce the risks of the coronavirus pandemic. During the first quarter of 2021, the company launched several SailSAFE health programs, including the mandatory vaccinations drive for all guests and crew members. In addition to the vaccination, the company announced the implementation of 74 Healthy Sail Panel for its fleet.

Encouraging Fleet Size

Norwegian Cruise is constantly looking to expand fleet size, which is currently at 28. It has plans to introduce nine more ships through 2027. Most of them are on order for Norwegian Cruise Line, while the rest are for Oceania Cruises and Regent Seven Seas Cruises. For the Regent brand, it has one Explorer Class Ship to be delivered in 2023. During the first quarter of 2021, the company has been methodically returning and relaunching its fleet operations that were delayed due to the COVID-19 pandemic and related travel restrictions.

Booking Conditions

Although overall booking volumes remain below historical levels, the company has been seeing solid demand for future cruise vacations. In spite of the reduced sales and marketing investments, bookings have been strong, resulting in a prolonged booking window with guests booking further into the future. Of late, the company has observed pent-up demand on its booking volumes. During the first quarter of 2021, overall bookings, net of cancellations, were more than double the volumes during the prior quarter. The company expects this positive demand trend to continue across all brands though 2022.

China a Major Market

The company announced a partnership with Alibaba Group in May 2017. Also, it introduced Norwegian Joy (cruise ship designed for Chinese travelers) in 2017. The ship, which can accommodate more than 3,500 passengers, started sailing from Shanghai in June 2017. By 2030, China is expected to become the world's second largest cruise market after the United States.

Zacks Investment ResearchImage Source: Zacks Investment Research

Concerns

The cruise industry has been brought to a standstill by the coronavirus-induced crisis. Chances of further voyage suspension due to the pandemic cannot be ruled out. Although the company announced the restart of cruise voyages during first-quarter 2021, it cannot evaluate the overall impact of the COVID-19 pandemic on its long-term or short-term business results. Also, the company expects to report a loss during the second quarter of 2021 and witness net loss until the company is able to resume regular voyages.

Furthermore, the company is bearing high costs associated with the suspension of cruise voyages and continued payment of protected commissions and crew salaries. The company's monthly average cash burn for first-quarter 2021 was approximately $190 million. For second-quarter 2021, it expects the average cash burn rate to temporarily remain elevated at approximately $190 million per month.

Zacks Rank

Norwegian Cruise — which shares space with Carnival Corporation & plc (CCL - Free Report) , Royal Caribbean Group (RCL - Free Report) and Vail Resorts, Inc. (MTN - Free Report) in the same industry — currently carries a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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