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Norwegian Cruise Gains From Expansion Despite Cuba Travel Ban

Zacks Equity Research

Norwegian Cruise Line Holdings Ltd.’s NCLH expansion strategies and modest demand-supply growth are likely to persistently aid top-line growth. However, high costs, debt burden and Trump’s travel ban to Cuba are likely to hurt the company.

Notably, Norwegian Cruise’s shares have gained 26.5% so far this year, outperforming the industry’s rally of 8.4%.

Let delve deeper into factors that suggest investors to retain the stock for the time being.

 

Fleet Expansion & Overall High Demand Aid

Higher demand for cruises has led Norwegian Cruise to expect a record book position in 2019. The company has worked diligently in improving book revenues. It has changed its payment policies and deposit structure, which in turn is driving revenues. Further, air travel services booked through Norwegian's Air program are bolstering demand.

In fact, in the first quarter of 2019, revenues grew 8.5% year over year, driven by an improvement of 9.4% in passenger ticket revenues. Total revenues were also favored by the addition of Norwegian Bliss and robust growth in organic pricing across all core markets. Strong onboard spending also had positive bearings on quarterly revenues.

Meanwhile, Norwegian Cruise is constantly looking to expand fleet size, which is currently at 26, following the launch of Norwegian Bliss in April 2018. It has plans to introduce 11 more ships through 2027. Most of them are on order for Norwegian Cruise Line, while the rest are for Oceania Cruises and Regent Seven Seas Cruises. Moreover, it introduced Norwegian Joy (cruise ship designed for Chinese travelers) in 2017. The ship, which can accommodate more than 3,500 passengers, started sailing from Shanghai in June 2017.

The company will take delivery of Norwegian Encore in fall 2019. The company has Allura Class Ships on order for delivery in the winter of 2022 and spring of 2025. With the project Leonardo, Norwegian Cruise will have an additional six ships with expected delivery dates from 2022 through 2027. This addition is likely to take the total berth count to roughly 82,000.

Concerns

Norwegian Cruise has been bearing the brunt of high expenses for quite some time. Fuel costs and net cruise costs are rising persistently. Moreover, by strengthening the international distribution system the company may improve yields, but incur higher expenses. In the first quarter, total cruise operating expenses increased 7.6% year over year.

Meanwhile, Trump administration's policy change on travel to Cuba is concerning. Travel ban to Cuba will have a huge impact on cruise industry affecting Norwegian Cruise, Royal Caribbean RCL and Carnival CCL. It is likely to negatively affect 2019 earnings by 35 to 45 cents.

Zacks Rank & Stock to Consider

Norwegian Cruise currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the leisure space is SeaWorld Entertainment SEAS, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SeaWorld Entertainment’s earnings for 2019 are expected to increase 184.6%.

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