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Norwegian Cruise Rides on Fleet Expansion Amid High Costs

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Norwegian Cruise Line Holdings Ltd. (NCLH - Free Report) is gaining from robust demand and modest capacity growth. The company is focusing on expanding its fleet size, which will enable it to generate higher yields. However, high costs and debt burden are potential headwinds for the company.

The company’s earnings have surpassed the Zacks Consensus Estimate in the last nine quarters. In fact, the company’s earnings beat the Zacks Consensus Estimate in the trailing four quarters, the average being 11.2%. In the first quarter of 2019, adjusted earnings of 83 cents per share surpassed the Zacks Consensus Estimate of 71 cents by 16.9%. The bottom line also improved 38.3% from the year-ago quarter’s figure.

For 2019, Norwegian Cruise expects adjusted earnings per share in the range of $5.40-$5.50, up from the previous view of $5.20-$5.30. The Zacks Consensus Estimate for 2019 earnings is pegged at $5.50, above the company’s guidance. Earnings estimates for the current year have moved up 3.8% in the past month.

Backed by an impressive earnings trend, shares of Norwegian Cruise have gained 3.8% in the past year, against the industry’s 4.1% decline.

 

Let us delve into factors that suggest that investors should hold the stock for the time being.

Expansion of Fleet & Overall High Demand Aid

Higher demand for cruises has led Norwegian Cruise to expect a record book position in 2019. The company has particularly worked in improving book revenues. It has changed its payment policies and deposit structure, which is driving revenues. Also, air travel services booked through Norwegian's Air program are boosting demand.

In fact, in the first quarter of 2019, revenues grew 8.5% year over year, driven by an improvement of 9.4% in passenger ticket revenues. Total revenues were also favored by the addition of Norwegian Bliss along with robust growth in organic pricing across all core markets. Strong onboard spending also had positive bearings on quarterly revenues.

Meanwhile, Norwegian Cruise is constantly looking to expand fleet size, which is currently at 26, following the launch of Norwegian Bliss in April 2018. It has plans to introduce 11 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. Moreover, 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.

It has plans to introduce 11 more ships through 2027. The company will take delivery of Norwegian Encore in fall 2019. The company has Allura Class Ships on order for delivery in the winter of 2022 and spring of 2025. With the project Leonardo, Norwegian Cruise will have an additional six ships with expected delivery dates from 2022 through 2027. This addition is likely to take the total berth count to roughly 82,000.

Concerns

Norwegian Cruise has been bearing the brunt of high expenses for quite some time. Fuel costs and net cruise costs are rising persistently. Moreover, by strengthening the international distribution system the company may improve yields, but incur higher expenses. In the first quarter, total cruise operating expenses increased 7.6% year over year. Gross cruise costs per capacity day increased 2.4%. Adjusted Net cruise costs (excluding fuel) per Capacity Day increased 3.6% on a constant-currency basis and 3% on a reported basis. Fuel price per metric ton (net of hedges) increased 2.9% to $461 in the quarter. Also, net interest expenses were $73.5 million in the first quarter, up from $59.7 million in the prior-year quarter.

Also, Norwegian Cruise faces intense competition from other established cruise companies as well as alternative leisure providers. Royal Caribbean (RCL - Free Report) and Carnival (CCL - Free Report) account for 25% and 44% of global industry capacity, respectively. Meanwhile Norwegian Cruise only accounts for 9% of the global industry. Also, non-cruise based vacation providers and other tour companies are substantial threat to the company’s operations.

Zacks Rank & Stock to Consider

Norwegian Cruise currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the leisure space is SeaWorld Entertainment (SEAS - Free Report) , which carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SeaWorld Entertainment’s earnings for 2019 are expected to increase 169.2%.

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