Norwegian Cruise Line Holdings Ltd. NCLH is likely to benefit from improving occupancy, sequential improvement in booking activities and fleet expansion efforts. This and the focus on cost saving initiatives bode well. However, inflationary pressures and geopolitical tensions pose concerns.
Let us discuss why investors should hold on to the stock for the time being.
Norwegian Cruise is benefitting from improvements in occupancy. In fourth-quarter 2022, occupancy was approximately 87%, in line with the company’s expectations. In the previous quarter, the company had reported an occupancy of 82%. During the quarter, the company reported sequential improvements in load factor, with a sequential gap reduction (of about 20%) from 2019 levels. The company anticipates occupancy ramp-up to continue and reach historical levels (of 100% plus) during the second quarter of 2023. Relaxation in COVID-related protocols is likely to add to the positives.
Sequential improvements in booking activities have been aiding the company. The bookings include incorporating higher pricing and the dilutive impact of future cruise credits (FCCs). During the fourth quarter of 2022, the company reported solid booking volumes courtesy of strong demand in the WAVE season. The company stated that the cumulative booked position for 2023 is higher than 2019 levels. Also, it reported strength in advance ticket sales. As of Dec 31, 2022, the company’s advance ticket sales balance came in at $2.7 billion, reflecting a hike of 9% (from the previous quarter) and 30% (from 2019 levels). The company stated pricing levels to be elevated. The company intends to focus on strategic marketing efforts to drive demand and high-value bookings in the upcoming periods.
The company emphasizes on its booking window to drive top-line. The initiative not only evaluates the extent and willingness of consumers to spend on cruise travel but also provides better visibility for price increases and moderating marketing expenses. During the fourth quarter of 2022, the booking window remained elongated compared with 2019 levels. The company anticipates the indicator to be a driving factor of sales in the upcoming periods. Also, emphasis on margin enhancement initiatives, such as corporate overhead reductions, itinerary optimization, supply chain initiatives and rationalization of product delivery, bodes well.
Norwegian Cruise is constantly looking to expand its fleet size to drive growth. It has plans to introduce eight more ships through 2027. Most are on order for the 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. For the Oceania Cruises brand, the company has two Allura Class Ships to be delivered in 2023 and 2025. For the Norwegian brand, the company has five Prima Class Ships on order, with scheduled delivery dates from 2023 through 2028. The company anticipates the additions to increase the birth count to approximately 82,000. In 2023, the company anticipates the additions of Norwegian Viva, Oceania Cruises Vista and Regent Seven Seas Grandeur to its fleet.
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In the past three months, shares of the company have declined 5.4% against the industry’s rise of 4.5%. The company’s operations are likely to be influenced by the uncertainty related to the Russian invasion of Ukraine. Also, geopolitical developments have pushed fuel curves higher. Due to the war, the management has decided to withdraw all activity in Russia. The company anticipates the close-end nature of the deployment change and its inability to find alternatives for the itineraries to disrupt booking patterns for some time.
Norwegian Cruise has been bearing the brunt of high expenses for quite some time. During the fourth quarter of 2022, total cruise operating expenses increased 69.9% year over year to $1,219.5 million. The company’s expenses in the quarter primarily stemmed from the resumption of cruise voyages. The company noted that the increase in 2022 reflects an improvement in payroll, fuel, and direct variable costs of fully operating ships. Also, inflationary pressures relating to food, perishables, and logistics added to the woes. The company anticipates inflation and global supply chain constraints to pressurize margins in the near term.
Zacks Rank & Stocks to Consider
Norwegian Cruise currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some other top-ranked stocks in the Zacks Consumer Discretionary sector are Las Vegas Sands Corp. LVS, Hilton Grand Vacations Inc. HGV and Crocs, Inc. CROX.
Las Vegas Sands sports a Zacks Rank #1. LVS has a long-term earnings growth rate of 2.5%. The stock has increased 40.9% in the past year.
The Zacks Consensus Estimate for LVS’ 2023 sales and EPS indicates a rise of 107.7% and 217.5%, respectively, from the year-ago period’s estimated levels.
Hilton Grand Vacations currently sports a Zacks Rank #1. HGV has a trailing four-quarter earnings surprise of 12.1%, on average. Shares of HGV have declined 18.8% in the past year.
The Zacks Consensus Estimate for HGV’s 2023 sales and EPS indicates a rise of 7.1% and 10.8%, respectively, from the year-ago period’s levels.
Crocs carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 21.8%, on average. Shares of Crocs have increased 42.3% in the past year.
The Zacks Consensus Estimate for CROX’s 2023 sales and EPS indicates a rise of 12.5% and 2.5%, respectively, from the year-ago period’s levels.
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