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Wells Fargo trims Norwegian estimates on Caribbean pricing

Wells Fargo trims Norwegian estimates on Caribbean pricing

Ahead of Norwegian Cruise Line reporting second quarter financial results, Wells Fargo Securities voiced concerns about Caribbean pricing and the diminishing premium spread between the brand's two newest ships and its legacy fleet.

Norwegian Getaway entered service in February from Miami and Norwegian Breakaway began sailing from New York in May 2013.

Since the brokerage's latest pricing study published in late June, Caribbean pricing has weakened for the fourth quarter of 2014 and the first quarter of 2015, Wells Fargo said in a note.

'We continue to feel that Caribbean pricing will likely stabilize for Q1 2015/early Q2 2015 sailings as year-over-year 2015 industry capacity in the Caribbean will be slightly down driven by a substantial Q3 2015 decline. However, we are beginning to question if entry level brands such as Carnival, Norwegian and MSC could be somewhat impacted by the bifurcation of the consumer evident at retail and restaurants,' Wells Fargo analyst Tim Conder said, referring to the greater economic challenges experienced by consumers in the entry-level portion of the cruise market compared to the premium brands.

If so, the recovery in Caribbean pricing—likely beginning in mid-2015—could be elongated for entry-level brands, Conder told investors.

Following pricing checks, Wells Fargo trimmed its 2014 and 2015 earnings per share forecasts to $2.30 and $2.69, down from $2.33 and $2.71 respectively, on slightly lower net yield expectations and fine-tuned interest expense assumptions.

Wells Fargo's revised net yield estimates for 2014/2015 are up 3.1%/3.1%, compared to up 3.4%/3%, and its revised valuation range goes to $36 to $38, from $38 to $40, reflecting more conservative multiple assumptions given what could be a longer than expected Caribbean pricing recovery for entry-level brands. The 'outperform' (buy) rating was affirmed.

Conder said a material upside catalyst for the stock is lacking until Caribbean pricing stabilizes.

NCLH closed at $32.40 Friday.

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