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UBS downgrades NCLH to 'neutral' from 'buy' on cost concerns

UBS cut Norwegian Cruise Line Holdings from 'buy' to 'neutral' following the stock's more than 30% gain since October versus the S&P's 10% increase.

'We believe the risk/return is skewed less favorably now,' UBS analyst Robin Farley said in a note. 'While we believe the demand environment is improving, we do see some uncertainty in the outlook for NCLH’s cost performance.'

JP Morgan, Wells Fargo contrasting views

This comes just a few days after JP Morgan made NCLH its top cruise pick, with a 'buy' rating, versus 'neutral' for Carnival Corp. and 'sell' for Royal Caribbean Group, while Wells Fargo favored Royal, with both RCL and NCLH rated 'overweight' (buy) and CCL 'sell.'

46% higher expense in Q4 than in 2019?

NCLH projects fourth quarter 2022 expense to be 46% higher than in 2019, 'so there are concerns about whether they can reduce that to mid-teens growth by next year,' UBS said. Farley noted Q4 2019 also included the cost of a ship inaugural 'so that was not a low base to begin with.'

Cost growth forecast outpaces CCL, RCL

UBS added it's not clear what's driving such high Q4 expense versus 2019 while guidance from Carnival is for low double-digit growth, and Royal projects a low to mid single digit increase.

Even if NCLH can do better than mid-teens expense growth excluding fuel in 2023 compared to 2019, in Farley's view the company's 17% capacity spike should be bringing better scale. She added that while NCLH hopes to beat its expense guidance, investors should not necessarily expect that to mean upside to the company's $2b EBITDA guidance for 2023.

Multiple goes to 10 from 12

The brokerage's NCLH price target is now $19, down from $24.

To calculate this, UBS lowered its multiple to 10 times earnings per share, below the pre-pandemic 12 it had been using, to better reflect the more challenging capital structure now. The brokerage's adjusted EPS forecast of $2.41 for NCLH is unchanged, however it subtracts stock-based comp, an estimated 33 cents, so using a three to five year price/earnings range with a 9 to 10 multiple results in a $19 target.

NCLH closed at $15.03 Tuesday, down 43 cents. Shares have traded in the range of $10.31 to $23.90 over the past 52 weeks.