Norwegian Cruise Line Is Navigating Through a Hurricane of Problems

Stocks to sell

The novel coronavirus pandemic has disrupted the cruise industry globally. Prior to 2020, the industry had been experiencing a years-long boom. Now that a bet on the global reopening of the economies is gaining momentum, is it the right time to buy cruise stocks such as Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) stock? There are many factors to weigh in on, but NCLH stock has a lot of hurdles to deal with now. Unfortunately, things do not look as rosy as some may think.

Source: Vytautas Kielaitis/

A well-known English proverb says “A smooth sea never made a skillful mariner.” There is also a popular Greek proverb that says “If you cannot catch a fish, do not blame the sea.” Both of these relate to the business conditions, challenges and risks that NCLH stock has to face now.

Current Cruise Industry Challenges

What do politics have to do with the state of the economy? A lot and nothing at the same time. But now, politics seem to play an important role in the reopening of the local and global economies. Recent news that the state of Florida sued the Centers for Disease Control and Prevention (CDC) and the Department of Health and Human Services to allow cruises to begin again, after being halted for more than a year as a result of the Covid-19 pandemic, is interesting and highlights the urgency of the cruise industry to restart its operations as soon as possible.

The CDC has issued cruise-ship guidance due to Covid-19. And as the reopening of the cruise industry seems vague for now, the majority of cruise companies have been complaining. But there is good news on the horizon.

Richard Fain, the CEO of Royal Caribbean Group (NYSE:RCL) said that “The U.S. Centers for Disease Control and Prevention (CDC) is engaging in a constructive dialogue with the cruise industry.” There is even better news, as Fain “highlighted that the CDC has stated that cruising could return as early as mid-July.”

If this happens, it should be very positive news for Norwegian Cruise Line. But some of the decisions taken during the last year of the pandemic are very bad news. Let me explain more about this pessimistic financial analysis.

NCLH Fundamentals: Trouble Ahead and a Lofty Valuation

It can be argued that few industries have raised as much money during the pandemic as the cruise-line companies. And NCLH is no exception. The company raised plenty of cash through debt and equity offerings.

Were these actions to raise the cash necessary? Most likely yes, as they provided ample cash to ride out the downturn. However, there is a price to pay for the decision. Future investor returns will probably be mediocre due to two main factors: higher interest expenses and a sharp increase in shares outstanding. This makes stock dilution a large negative problem for shareholders.

In 2019, Norwegian Cruise Line had 215 million shares outstanding. In 2020, the shares outstanding increased to 254 million, and in 2021 it is estimated that shares outstanding may increase to 355 million. This is a huge stock dilution, which lowers the intrinsic value of NCLH stock.

What about the increase in debt? In 2019, the company had long-term debt of $6.05 billion. However, in 2020, the debt level was $11.68 billion, an increase of about 93%.

Interestingly, there was a slowdown in both revenue and net income growth in 2019 compared to 2018, as the pandemic was absent then. Revenue growth fell to 6.73% or $6.46 billion in 2019, compared to $6.06 billion in 2018, a growth of 12.21% compared to 2017.

In 2019, the decline of net income growth was moderate, reported at -2.58% compared to a net income growth of 25.66% reported for 2018. And 2020 was a year of heavy losses as the company reported a negative net income of $4.01 billion.

This heavy and even historic loss — at least for the most recent five-year period — means that the book value of equity suffered dramatically in 2020, as losses were reflected in the balance sheet and to the shareholders’ equity.

Indeed, according to MorningStar, the book value per share for 2020 was $12.95, or about 44% of what book value per share was in 2019, at $29.44 per share. This decline is too big to ignore from a valuation perspective.

And as the NCLH stock has a one-year performance of nearly 175% as of the time of publication, the stock seems too pricey now.

But can things get worse for NCLH stock? To my financial analysis, the answer is yes. Dividends and share repurchases are probably off the table for several years to come, as the company will focus on its debt reduction.

And this debt reduction should be made quick, as, according to Gurufocus, the NCLH stock has an Altman Z-Score of -0.03. This implies the company is in distress mode and bankruptcy is a possibility in the next two years.

Furthermore, Norwegian Cruise Line had a severe problem with declining free-cash-flow growth in 2019. The company reported free cash flow of $185.44 million in 2019 or a decline of 63.52% compared to 2018. And in 2020, free cash flow took a big hit with a figure of -$3.5 billion. This only amplifies the overall very weak financials of the company now.

An Optimistic Outlook for the Cruise Industry

The optimistic case is that the cruise lines will benefit from an increase in demand as more people receive vaccines and the economy reopens gradually. There is euphoria due to the reopening and even momentum in investors’ sentiment now.

Research by the Cruise Lines International Association (CLIA) about the outlook of the cruise industry is highly optimistic. It estimates that, despite a challenging year in 2020, two out of three cruisers will be willing to cruise within a year. Furthermore, 58% of international travelers who have never cruised before will likely take a cruise in the next few years.

Norwegian Cruise Line CFO Mark Kempa said in the company’s fourth-quarter earnings release that there is a focus on financial recovery for the company. Norwegian Cruise Line recently offered to sail ships with fully vaccinated passengers and crew to restart U.S. voyages in July.

Norwegian’s CEO, Frank Del Rio, told CNBC that “it’s time to get back to cruising” and that fully vaccinated ships will be among the safest venues anywhere.

These are all positive developments. But with the stock dilution history, heavy losses for 2020 and a recovery that seems slow — although certain — the risks for NCLH stock are too much to ignore for now. It is not a cheap stock, and its rally has been the result of optimism and speculation.

It is wiser to avoid NCLH stock for now. With a very weak financials, even more stock offerings may be on the horizon. And this is not good news for the investors of an already lofty stock.

On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn