Norwegian Cruise Line Holdings (NCLH) stock shed more than 12% of its value on Monday as recession fears kicked it up a notch. May’s inflation numbers were the hottest in 40 years, and the odds of a 75 basis point rate hike from the Fed looks pretty likely.
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As rates continue to soar, many investors are bracing themselves for a hard landing into a recession. Sure, a soft landing would be nice, but inflation is not giving the Fed much wiggle room. They may be out of options, and it’s discretionary firms like Norwegian that have been punished most severely.
For cruise line shareholders, it’s one bad thing to another. Though the COVID-19 pandemic is under control, the wallets of prospective cruisers have fallen under considerable pressure.
As we approach an economic downturn, there’s a real risk that any pent-up demand for pleasure travel will be lost. With the mix of higher inflation and the potential for unemployment to increase, it will be very hard for Norwegian to sustain a bounce-back as it sets its sails for the summer. Count it as another lost season for Norwegian, which saw its shares shed nearly half of their value year-to-date.
There’s not much to look forward to with Norwegian. And that’s likely why the stock has been punished so severely. It’s almost all negative these days, with the cruise line grappling with higher fuel costs, upward wage pressures, and the $13.6 billion of debt weighing down its balance sheet. Of course, there’s the pandemic — which is not yet over — a potential recession, and Monkeypox to worry about.
Cruise line investors are badly bruised, but with so much negativity already priced in, the valuation is enticing for cigar-butt investors seeking to get one last puff on the house. At writing, NCLH stock trades at 4.7 times sales and 3.7 times book value. I am bullish on the stock, as it looks to flirt with 2020 lows, primarily due to valuation.
On TipRanks, NCLH scores a 3 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to underperform the broader market.
A Recession Seems Baked Into the Share Price
The company has come a long way since sailing was halted during the early days of the pandemic. Still, the stock is back to the levels it plunged to during the coronavirus market crash.
Inflation has taken a toll, and the surge in oil prices could take a big bite out of margins over the foreseeable future. For the first quarter, fuel expenses surged to $136 million, above estimates of $131 million. Total expenses soared to $735 million.
Spending on COVID-19 safety procedures and elevated fuel prices will likely weigh down the firm, as onboard spending falls in response to the stressed consumer. With a potential consumer recession and another variant of COVID-19 that could cause an autumn outbreak, it seems as though cruising is no longer economical.
Even if we are due for a recession, things will eventually normalize in due time. Oil is unlikely to stay above $120 per barrel over the long-haul, and the consumer — think millennials — will be back to spending considerable sums on experiences. Until things normalize, CEO Frank Del Rio has his hands full, and it won’t be smooth sailing.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, NCLH stock comes in as a Moderate Buy. Out of 10 analyst ratings, there are five Buy recommendations and five Hold recommendations.
The average Norwegian Cruise Lines price target is $22.00, implying an upside of 90.48%. Analyst price targets range from a low of $14.00 per share to a high of $33.00 per share.
The Bottom Line on Norwegian Cruise Lines Stock
Norwegian Cruise Lines stock has sunk amid the perfect storm of headwinds. Higher expenses and weaker demand could plague the company for another two years. Once the storm clouds pass and the firm is ready to make the most of the next expansionary economic cycle, I’d look for the stock to return to rally mode.
Until then, any bounces will be in response to better-than-feared results. If the Fed can engineer that soft landing and avoid a full-blown recession, NCLH stock could be in for a huge bounce. Until then, it’ll likely be a slog for the firm, as it does everything it can to make the most of a horrid situation.
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