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Will Norwegian (NCLH) Beat on Q2 Earnings Despite Cost Woes?

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Will Norwegian (NCLH) Beat on Q2 Earnings Despite Cost Woes?

High ticket revenues on the back of increased demand for cruise travel are likely to boost Norwegian's (NCLH) top line in the second quarter. However, rising fuel costs might limit bottom-line growth.

Norwegian Cruise Line Holdings Ltd. NCLH is slated to release second-quarter 2018 results on Aug 9, before the market opens.

In the first quarter of 2018, the company delivered a positive earnings surprise of 11.1%. Norwegian Cruise Line also surpassed the Zacks Consensus Estimate for earnings in each of the trailing four quarters, with an average beat of approximately 6.6%.

Things look rosy for the company in the to-be-reported quarter as well. Solid passenger ticket revenues are likely to boost the quarterly results. In fact, the Zacks Consensus Estimate for second-quarter earnings has remained stable at $1.03 cents per share over the last 60 days. However, this reflects an improvement of 6.2% from the comparable figure a year-ago. 

Given this backdrop, let’s delve deeper to find out the factors likely to have a bearing on the company’s results in the quarter to be reported.

We expect high costs to limit Norwegian Cruise Line’s bottom-line growth in the second quarter. Investments undertaken by the company to upgrade the facilities for travel are also pushing up costs. Moreover, an increase in fuel prices is likely to prove detrimental to the company’s earnings growth. The company expects fuel price per metric ton, net of hedges, to increase 4.9% sequentially to $470. Notably, oil prices have been on an uptrend with a 14% increase in second-quarter period (April-June).

It should be noted that high oil prices do not bode well for travel-focussed companies like Norwegian Cruise Line as fuel costs account for a significant chunk of their expenditures. Evidently, rise in fuel costs have been responsible for the Norwegian Cruise Line stock shedding 10.8% of its value in the April-June period.

Second-Quarter Price Performance

 

However, Norwegian Cruise Line’s top line in the second quarter is likely to be driven by increased ticket revenues on the back of the burgeoning demand for cruise travel. Also, improved pricing should boost the company’s revenue growth. This apart, Norwegian Cruise Line’s robust marketing initiatives looks promising.

The Zacks Consensus Estimate for passenger ticket revenues in the to-be-reported quarter is pegged at $1,047 million, above $938 million reported in the second quarter of 2017. 

Moreover, Onboard and Other revenues are expected to continue with the momentum of the first quarter (up 10.8% year over year) and improve in the quarter to be reported. The Zacks Consensus Estimate for the segment’s revenues is pegged at $454 million, reflecting a year-over-year increase of more than 11%.

On the back of higher revenues, we expect Norwegian Cruise Line to report better-than-expected earnings per share in the second quarter despite high costs. We remind investors that fellow-cruise company Royal Caribbean Cruises Ltd. RCL outperformed in the second-quarter, courtesy of higher passenger ticket as well as onboard and other revenues.

Norwegian Cruise Line Holdings Ltd. Price and EPS Surprise

 

Norwegian Cruise Line Holdings Ltd. Price and EPS Surprise | Norwegian Cruise Line Holdings Ltd. Quote

What Does Our Model Indicate?

Our proven model too shows that Norwegian Cruise Line is likely to beat on earnings in the second quarter. This is because the stock has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase its odds of an earnings surprise.

Earnings ESP: Norwegian Cruise Line has an Earnings ESP of +0.36% (Most Accurate Estimate is a cent above the Zacks Consensus Estimate). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Norwegian Cruise Line carries a Zacks Rank #3, which when combined with a positive ESP makes us confident of an earnings beat.

Conversely, we caution against stocks with a Zacks Ranks #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Key Picks

Norwegian Cruise Line is not the only company in the broader Consumer Discretionary sector that is looking up this earnings season. Here are some companies from the same space, which according to our model also have the right combination of elements to post an earnings beat:

The Madison Square Garden Company MSG has an Earnings ESP of +13.81% and a Zacks Rank #3. The company is scheduled to report fourth-quarter fiscal 2018 results on Aug 16. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

NIKE, Inc. NKE has an Earnings ESP of +2.33%. This Zacks #3 Ranked company is expected to report first-quarter fiscal 2019 results on Sep 25.

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Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
 
Norwegian Cruise Line Holdings Ltd. (NCLH) : Free Stock Analysis Report
 
The Madison Square Garden Company (MSG) : Free Stock Analysis Report
 
NIKE, Inc. (NKE) : Free Stock Analysis Report
 
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