The Reopening Trade Should Move Norwegian Cruise Line Higher

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Between January and March of last year, Norwegian Cruise Line (NYSE:NCLH) stock went from $60 to $10.

Norwegian Pearl, a Norwegian Cruise Line (NCLH) ship, in the middle of the ocean

Source: Vytautas Kielaitis/shutterstock.com

It’s a plunge that seems to make some sense. Obviously, the novel coronavirus pandemic shut down the cruise industry.

But at the same time, the depth of the plunge seemed overwrought. Within a couple of months, as horrible as the pandemic was, we were seeing signs of light at the end of the tunnel. Vaccines were being developed and treatments devised.

As investors often do, they focused too much on the near-term. Norwegian had a brutal 2020. Incredibly, its revenue dropped 80% last year. It actually seems like it could have been worse.

Even on an adjusted basis, Norwegian lost almost $9 per share, against earnings over $5 in 2019.

But that swing of about $14 didn’t justify an erosion of some $50 off the NCLH stock price. Some investors are starting to figure that out, and the stock has rallied.

Shares still are down by half from pre-pandemic levels, however. That leaves more investors to (pardon the pun) get on board — and more upside ahead for NCLH stock.

The Roaring 2020s

Before the pandemic, I wrote about a decade I thought would be known in the market as the “Roaring 2020s.” Even at the depths of the pandemic, I stuck to my optimism.

What I was referring to were the sheer number of explosive megatrends that provided the potential for huge returns in the market: electric vehicles, artificial intelligence, cryptocurrency and others.

Of course, I couldn’t call the decade the “Roaring Twenties.” That name is already taken — by the 1920s.

The 1920s followed the Spanish flu pandemic of 1918, to which the novel coronavirus is sometimes compared. (The Spanish flu, however, was far more devastating.) And while my original optimism toward this decade was based on technological trends, we’re likely to see some social similarities to the decade 100 years prior too.

Put simply, consumers are ready. They’re ready to get out, to do things and to get back to living.

Affluent consumers, in particular — most of whom were able to keep their jobs by working from home — have built up enormous savings over the past 13 months. A strong stock market has helped as well.

Many of those consumers are itching to spend at least a chunk of those savings on big parties and big vacations. There is a ton of pent-up demand right now.

Why Norwegian Will Be a Winner

And Norwegian is positioned perfectly to take advantage of that pent-up demand.

It’s one of the higher-end global cruise lines. As one analyst noted recently, it has a lower share of children on its sailings. And cruisers may love children, but they’re not going to want to cruise with them, particularly if they all were stuck in the same house for months on end.

As vaccinations spread and normalcy returns, travel spending is going to spike. And thanks to both higher savings and the toll of the past year-plus, most travelers probably are going to go bigger and go better.

Norwegian is bigger and better than other cruise lines and many other forms of travel. It’s going to see a ton of demand from travelers looking for a “once in a lifetime” trip, or something close to it.

The Case for NCLH Stock

So yes, 2020 was awful for Norwegian. It was worse than any executive or investor could possibly have dreamed.

But here’s what investors have to remember. Once sailings start, the results are going to be better than they otherwise might have been.

We don’t know exactly when that will be. Norwegian wants to resume sailings from the U.S. on July 4. It has the state of Florida in its corner.

It doesn’t really matter exactly when sailings resume, however. A few months’ difference doesn’t really matter to the long-term case, and that’s what we need to be focused on.

Rather, the point is that Norwegian will have a reasonably long stretch where it actually overearns. Then, over time, as we all get back to normal, so will its results.

I’m certainly not saying NCLH is some hidden “pandemic winner.” The pandemic was not a good thing for the business. It still had to take on debt and sell stock to fix up its balance sheet.

But remember that NCLH stock is still down by half from where it traded 15 months ago. And remember that it trades for about 6x 2019 earnings.

Over time, the company is likely to get back to that level. And along the way, it may well set a few records. Yes, the stock has doubled in a few months’ time. At some point soon, however, it’s still going to look ridiculously cheap.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

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