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Norwegian Cruise Line navigates a hurricane of problems
The novel coronavirus pandemic has disrupted the cruise industry worldwide. Before 2020, the industry had boomed for years. Now is the time to buy cruise stocks like Norwegian Cruise Line Holdings Ltd. (NYSE: NCLH) to buy as a bet on reopening economies around the world gains momentum? There are many factors to be weighed, but NCLH stock now faces many hurdles. Unfortunately, things are not looking as rosy as some might think. Source: Vytautas Kielaitis / shutterstock.com A well-known English proverb says: “A smooth sea has never made a skilled navigator.” There is also a popular Greek saying, “If you can’t catch a fish, don’t blame the sea.” Both relate to the terms and conditions, challenges and risks that NCLH stock now faces. InvestorPlace – Stock market news, stock advice and trading tips Current challenges facing the cruise industry What does politics have to do with the economy? Much and nothing at the same time. But now politics seems to be playing an important role in reopening the local and global economies. Recent news says the state of Florida has sued the Centers for Disease Control and Prevention (CDC) and the Department of Health and Human Services to allow cruises to resume after falling for more than than as a result of the Covid-19 pandemic stopped for a year is interesting and underscores the urgency of the cruise industry to resume operations as soon as possible. The CDC has issued instructions for cruise ships due to Covid-19. And since the reopening of the cruise industry seems vague for the time being, the majority of cruise lines have complained. But there is good news on the horizon. 7 retail stocks blocked with e-commerce Richard Fain, CEO of the Royal Caribbean Group (NYSE: RCL), said, “The US Centers for Disease Control and Prevention (CDC) is having a constructive dialogue with the cruise industry.” even better news when Fain “pointed out that the CDC has said the cruise could return as early as mid-July”. If so, the news for Norwegian Cruise Line should be very positive. But some of the decisions made in the final year of the pandemic are very bad news. Let me explain more about this pessimistic financial analysis. NCLH Basics: Trouble Up Front And A High Rating It can be argued that few industries raised as much money as the cruise lines during the pandemic. And NCLH is no exception. The company raised a lot of money through debt and equity offers. Were these measures necessary to raise the money? Most likely yes, as they provided ample cash to weather the downturn. However, there is a price to be paid for the decision. Future investor returns are likely to be mediocre due to two main factors: higher interest expense and a sharp increase in the number of stocks issued. This makes stock dilution a major negative issue for shareholders. In 2019, Norwegian Cruise Line had 215 million shares outstanding. In 2020, the number of shares issued rose to 254 million, and in 2021 it is estimated that the number of shares issued could increase to 355 million. This is a tremendous dilution of the stocks that will lower the intrinsic value of NCLH stocks. What about the rise in debt? In 2019, the company had long-term debt of $ 6.05 billion. However, in 2020 its debt was $ 11.68 billion, up around 93%. Interestingly, both sales and net income growth slowed in 2019 compared to 2018 as the pandemic was absent at the time. Revenue growth declined to 6.73% or $ 6.46 billion in 2019, compared to $ 6.06 billion in 2018, up 12.21% from 2017. In 2019, the decline in net income growth was moderate and was -2.58% compared to net profit For 2018 a growth of 25.66% was reported. 2020 was a heavy loss year as the company posted negative net income of $ 4.01 billion. This heavy and even historic loss – for at least the last five year period – has caused the book value of equity to suffer dramatically in 2020 as the losses were reflected in the balance sheet and equity. According to MorningStar, book value per share for 2020 was $ 12.95, or about 44% of book value per share in 2019, at $ 29.44 per share. From a valuation perspective, this decline is too great to ignore. And with NCLH stock showing nearly 175% year-on-year performance at the time of writing, the stock now appears to be too expensive. But can it get any worse for NCLH stock? The answer to my financial analysis is yes. Dividends and share buybacks are likely to be off the table for a few more years as the company focuses on deleveraging. And that deleveraging should be done quickly, given that, according to Gurufocus, NCLH stock has an Altman Z-Score of -0.03. This implies that the company is in emergency mode and bankruptcy is possible within the next two years. Additionally, Norwegian Cruise Line had a serious problem with the decline in free cash flow growth in 2019. The company reported free cash flow of $ 185.44 million in 2019, or a decrease of 63.52% from 2018. 2020 took off the free cash flow a huge hit with a figure of $ 3.5 billion. This only adds to the company’s overall very weak finances. An optimistic outlook for the cruise industry The optimistic case is that cruise lines will benefit from an increase in demand as more people get vaccines and the economy gradually re-opens. There is euphoria from the reopening and even the momentum in investor sentiment. The Cruise Lines International Association (CLIA) research on the outlook for the cruise industry is extremely optimistic. It is estimated that despite a challenging year in 2020, two out of three cruisers will be ready to cruise within a year. Additionally, 58% of international travelers who have never cruised before are likely to cruise in the next few years. Mark Kempa, CFO of Norwegian Cruise Line, said in the company’s fourth quarter earnings release that the focus is on the company’s financial recovery. Norwegian Cruise Line recently offered to sail ships with fully vaccinated passengers and crew members to resume US voyages in July. Norwegian CEO Frank Del Rio told CNBC that “it is time to cruise again” and that fully vaccinated ships will be some of the safest venues around. These are all positive developments. However, given its dilution history, heavy losses for 2020, and a rebound that seems slow – if certain – the risks to NCLH stock are too great to ignore for now. It’s not a cheap stock, and its rally was the result of optimism and speculation. It is wiser to avoid NCLH stocks for now. If the financials are very weak, more stock offers could be in sight. And that’s bad news for investors in an already high stock. At the time of publication, Stavros Georgiadis, CFA, held (neither directly nor indirectly) positions in the securities identified in this article. Stavros Georgiadis is a CFA charter holder, equity research analyst and economist. He is focused on US stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written various articles for other publications in the past and can be reached on Twitter and LinkedIn. More from InvestorPlace Why Everyone Is Investing In 5G WRONG It doesn’t matter if you get $ 500 million or $ 5 million in savings. Do this now. Top Stock Picker Reveals Its Next Potential 500% Winning Prodigy Who Found NIO At $ 2 … Says You’ll Buy THIS Now The Post Norwegian Cruise Line Navigating A Hurricane of Problems first appeared on InvestorPlace.