Wells Fargo lifts Norwegian range on improved Caribbean pricing

Pricing is strengthening across the line's Caribbean fleet, including new ships Norwegian Getaway and Norwegian Breakaway as well as older ships, the brokerage said in a note.

Slowing industry capacity growth and easy comparisons should allow for NCLH and industry Caribbean pricing to consistently recover especially in Q2 2015 and beyond, according to Wells Fargo. The brokerage noted Caribbean industry capacity peaks in the current (third) quarter with a 22% spike after a Q2 increase of 19%. The Q4 increase is 14%, while Q1 2015 capacity will be up mid single digits, Q2 up low single digits and Q3 capacity down.

Norwegian's Q1 2015 Caribbean supply will increase 8.8%, lapping Norwegian Getaway's February 2014 introduction.

'However, we believe industry Caribbean pricing recovery will be tempered for entry-level brands by on-going consumer purchasing power bifurcation between entry-level brands and premium brands,' Wells Fargo analyst Tim Conder said.

Additional Caribbean detail is expected Tuesday when Carnival Corp. reports Q3 earnings.

Wells Fargo estimates NCLH earnings per share for 2014 as $2.29, up from $1.31 in 2013, and 2015 EPS as $2.64, based on net yield increases of 3.1% this year and 3% in 2015. The 2015 estimates do not reflect the pending Prestige Cruises International acquisition, expected to close in Q4.

The brokerage raised its valuation range to $39 to $41, up from $36 to $38, reflecting Norwegian management’s expected 7% to 9% of 2015 EPS accretion from the Prestige acquisition and related refinancing, and reiterated its 'outperform' (buy) rating for NCLH.

Wells Fargo expects Prestige could add 18 cents to 25 cents per share to Norwegian's 2015 EPS via a combination of cost savings and refinancing.

The $39 to $41 valuation is based on 14.8 to 15.5 times price/earnings and a 12.4 to 12.9 times EV/EBITDA to Wells Fargo's 2015 EPS and EBITDA estimates of $2.64 and $4.55, respectively.

'Bottom line: NCLH shares are attractive in our view given the Prestige accretion and Caribbean pricing trends,' Conder summed up.

NCLH closed at $36.79, up 2 cents, on Monday.