Norwegian Cruise Line’s stock price has taken a beating over the past six months, shedding 24.5% of its value and falling to $15.31 per share. This might have investors contemplating their next move.
Is there a buying opportunity in Norwegian Cruise Line, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Norwegian Cruise Line Will Underperform?
Even with the cheaper entry price, we don’t have much confidence in Norwegian Cruise Line. Here are three reasons we avoid NCLH, plus one stock we’d rather own.
1. Weak Growth in Passenger Cruise Days Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Norwegian Cruise Line, our preferred volume metric is passenger cruise days). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Norwegian Cruise Line’s passenger cruise days came in at 6.75 million in the latest quarter, and over the last two years, averaged 4.8% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Free Cash Flow Gains to Pump Profits
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Norwegian Cruise Line will continue burning cash, albeit to a lesser extent. Their consensus estimates imply its free cash flow margin of negative 11.7% for the last 12 months will increase to negative 6.8%.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Norwegian Cruise Line burned through $1.19 billion of cash over the last year, and its $15.03 billion of debt exceeds the $218.1 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Norwegian Cruise Line’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Norwegian Cruise Line until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Norwegian Cruise Line, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 12.4× forward P/E (or $15.31 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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