'NCLH: Things Are Good, But Who Cares?'
Following NCLH's positive first quarter earnings report and raised full-year guidance last week, cruise shares fell. Wells Fargo's subsequent note had the pithy title: 'NCLH: Things Are Good, But Who Cares?' citing strengthening demand for cruises, higher booked capacity and pricing across virtually every geographic region and a lengthened industry booking curve, estimated as seven months.
'Nevertheless, cruise equities continue to see multiple compression as investors appear increasingly fixated on 5%-7% net global 2018-2022 capacity growth and potential recessionary concerns that could develop,' analyst Tim Conder said.
Valuations reaching low ends of historical ranges
These are 'valid concerns that bear monitoring,' he added, but went on to state cruise stock valuations are reaching low ends of historical ranges, leading Wells Fargo to conclude the 'risk/reward is difficult to ignore, especially relative to other consumer discretionary groups.'
The NCLH analyst day bolstered Wells Fargo's view.
'The company is approaching a financial free cash inflection point that should be increasingly returned to shareholders within the context of sub three-times leverage,' Conder said.
As well, NCLH's revenue management and data analytics are better than the brokerage thought. The revenue management system was significantly upgraded in 2015. Booked percentage of available capacity was 60% entering 2018 compared to 35% entering 2015, Conder said, and the company's upgraded CRM/data analytics app system is expected within 12 months.
The Norwegian Cruise Line brand's 120-day full payment policy has enhanced yield management and pricing, reducing booking churn and close in-bookings.
Initiation of a dividend in 2019?
2020 guidance anticipates double-digit adjusted earnings per share, return on invested capital of approximately 12% and leverage of 2.5%-2.75%—lower than Wells Fargo expected. $1bn to $1.5bn of free cash flow yet to be allocated would likely to go share repurchase and 2019 initiation of a 'competitive' dividend, Conder said.
Addressing supply growth, Conder cited a 'very reasonable' ability to absorb 6.5% annual (gross) global cruise industry growth through 2022, given several factors. Euromonitor projects a 5% compound annual growth rate in global travel spending, 8% of global travel spending is captured by cruising, the fact that cruising satisfies 'experiential' demographic trends and cruising's value versus other types of vacations.
Frank Del Rio stays longer? Andy Stuart moves up?
On succession at NCLH, Conder said there were no mentions of a long-term successor to president and CEO Frank Del Rio or the company's CFO search. But the analyst suggested Del Rio could possibly stay on beyond the expiration of his contract in 2020, when he would be 66, that NCL brand president and CEO Andy Stuart, 54, could be a successor to Del Rio and that interim CFO Mark Kempa, 46, could become the permanent CFO.
Wells Fargo's $67 price target for NCLH is based on a 12.7 multiple of price/earnings and an 11.3 multiple of enterprise value/EBITDA range to the brokerage's 2019 earnings per share estimates of $5.27 and $9.08, respectively. NCLH closed at $51.51 Friday.
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