It’s been a rough year for Norwegian Cruise Line (NYSE:NCLH) and owners of NCLH stock.
Coming into the year, the cruise industry was riding high on strong consumer spending and healthy travel appetite. NCLH was trading near all-time highs around $60. Revenues and profits were soaring. Life was good.
Then Covid-19 hit. And everything turned sour overnight for the cruise industry.
Consumer spending dried up. Travel appetite died. Cruise operations were halted. Revenues and profits plunged. So did NCLH, which as of this writing, trades at $16 — a whopping 73% below its late-2019 highs.
But, for three big reasons, I think NCLH is primed for a huge turnaround in 2021-2022, the likes of which could see the share price double over the next 12 to 15 months.
Here’s a deeper look.
NCLH Stock: Consumer Behavior Is Already Normalizing
Look around you. Doesn’t it feel like things are getting back to normal?
People are going out more. Traffic is coming back. Malls, shops and restaurants are busier. Movie theaters are open. So are theme parks. Sports are back. Students are going back to school. Employees are returning to the office.
These things are happening. Everywhere. According to smartphone tracking data from SafeGraph, consumer mobility across the U.S. — which plunged as much as 20% below normal in April — is now just 2-3% below normal levels.
And this is all before we have a vaccine. Imagine what will happen when we actually get a vaccine. It will spark mass consumer behavior normalization so that most consumers will be just as social and mobile as they were before the pandemic struck.
In other words, it appears consumers are committed to being as normal as they can be, even while the pandemic continues to spread.
For stocks to whom Covid-19 was a huge headwind — like Norwegian stock — this rapid societal and consumer behavior normalization is a big positive.
Consumers Love to Travel
There’s a belief out there that cruise travel volume will be permanently depressed going forward. This belief is flawed, and ignores the reality that consumers love to travel.
The consumer’s appetite to travel and see the world is large. Last summer, more than 70% of Americans were planning to take a big summer vacation. That’s why this year — amid the pandemic which kept people off planes — consumers didn’t just sit at home and twiddle their thumbs. They traveled in “safe” ways.
So, consumers are still traveling. They just aren’t doing so by cruise because it has been deemed “unsafe” by the general public.
This won’t last. We will get the virus under control, most likely through mass vaccinations at some point in 2021. As soon as we do, public fear of going on cruises will disappear. And this enormous consumer appetite to travel will flow from cars and road trips today, back to cruises by 2022/23.
To that end, I think Norwegian’s operations — and Norwegian stock — could look pretty normal by the end of next year.
Huge Upside for Norwegian Stock
For reasons I don’t have to explain, Norwegian stock is dirt cheap today, at around 0.7-times trailing sales versus an average trailing sales multiple of roughly two.
This dirt cheap valuation won’t last, because today’s depressed travel trends won’t last, either — and that’s why I see Norwegian stock doubling over the next 12 to 15 months.
The mental framework is simple.
Fiscal 2020 will unarguably be an awful year for Norwegian. But consumers will start traveling again in 2021, boosted by low travel prices, pent-up demand, robust government stimulus and a potential vaccine.
Then, by the start of fiscal 2022, we will have gone through a full year of cruise operations, with a vaccine, and hopefully without many serious, cruise-related Covid-19 cases. Consumers will regain their confidence in cruises. Global cruise demand will recover to levels just shy of 2019 levels. And Norwegian’s revenues will nearly recover to where they were in 2019.
From a numbers perspective, that implies somewhere around $6 billion in revenues by 2022. Profit margins won’t fully recover. Historically, they have run around 18%. But higher cleaning costs going forward will push steady-state operating margins down closer to 10% to 12%.
Assuming so, my modeling suggests that by 2022, Norwegians’ earnings per share could rebound to $2.50. Based on a historically-average 12-times forward earnings multiple, that implies a 2021 price target for NCLH of $30 — about double today’s NCLH stock price.
Bottom Line on NCLH Stock
NCLH is a compelling stock to buy over the next 12 to 15 months to play consumer behavior normalization, a potential Covid-19 vaccine and robust pent-up global travel demand.
The ride will not be smooth. It will almost assuredly be very choppy. So if you can’t stomach the volatility, pass on Norwegian stock. But if you can afford to buy this stock today and go away for the next ~12 months, then I think doing just that is the smartest move here.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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