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Wells Fargo trims NCLH outlook on weak US demand for Europe

Wells Fargo trims NCLH outlook on weak US demand for Europe
On the eve of Norwegian Cruise Line Holdings reporting second quarter earnings, Wells Fargo Securities reduced its estimates for NCLH on continued North American sourcing weakness for Southern European and Eastern Mediterranean itineraries. Foreign exchange and fuel costs also played into the reduction.

In a note, Wells Fargo said many of these concerns and lowered expectations are already discounted into NCLH shares.

Relative to competitors, NCLH’s greater dependence on North American sourcing—80% to 85% of its business—leaves the company more exposed to weakening demand and pricing for Southern European and Eastern Mediterranean consumers in light of rising geopolitical and terrorist incidents.

Wells Fargo analyst Tim Conder noted that with a more limited European sales and marketing infrastructure, NCLH also has less ability to offset North American sourcing weakness via European-sourced passengers.

The brokerage reduced its 2016 and 2017 earnings estimates for NCLH and lowered the stock's valuaton to $62 to $65, from $72 to $75 previously, based on a price/earnings multiple of 13.1 to 13.7 its 2017 EPS estimate. The 2016 EPS estimate went to $3.62, down from $3.79, and the 2017 estimate to $4.73 from $5.07. 

Of that, for 2016/2017 respectively, 14 cents/25 cents is from weaker core demand for Europe (close-in bookings and on-board spending), while 2 cents/7 cents is net related to unfavorable foreign exchange and fuel cost. Wells Fargo also cut a penny from its 2016 estimate and 2 cents from its 2017 estimate due to lower share buyback than it had previously assumed, given that NCLH will focus on debt reduction in the second half of this year.

Conder said NCLH is less exposed to foreign exchange pressures than Carnival Corp. and Royal Caribbean, given its limited 20% foreign exchange exposure, including 5% related to the British pound. Also, it should be less impacted by rising fuel costs given its strong hedged fuel position, about 92% of 2016 consumption and 82% of 2017 consumption.

Citing weakness in NCLH share prices since early July and recent industry insider purchases buoying shares, Wells Fargo forecasts limited further downside risk and advised investors to continue to use volatility to build positions given long-term industry fundamentals and attractive valuation. The brokerage rates NCLH 'outperform' (buy).

Shares closed at $43.10, up 3.46%, on Friday.