Why one analyst is bullish on Norwegian Cruise Line

Shares of Norwegian Cruise (NCLH) are down 80% year to date, but one analyst views the stock “as materially undervalued” if cruises rebound going into 2021.

In a note to investors Jaime M. Katz, senior equity analyst at Morningstar writes, “We had already factored in a slow resumption to cruising, with estimated capacity declines of 70% and 50% in the third and fourth quarters of 2020, respectively. While our cost outlook could worsen for higher near-term expenses, we expect this to be partially offset by our yield improvement in 2021.”

Norwegian swung to a loss last quarter as it cancelled voyages around the world amid COVID-19. However the company struck a positive tone for future travel noting: “there continues to be demand for cruise vacations particularly beginning in the fourth quarter 2020 accelerating into 2021.”

“This implies pricing in 2021 could be positive, rather than the low-single-digit decline we forecast,” wrote Katz.

“Moreover, the majority of 2021 demand stems from new bookings, rather than canceled re-bookings, indicating cruisers are not turning away from the product. In turn, we expect just a single-digit decline to our $26.50 fair value estimate and view shares as materially undervalued,” he added.

The Norwegian Jewel, background, is docked in Honolulu on Monday, March 23, 2020. (AP Photo/Caleb Jones)

Morningstar maintains a ‘very high uncertainty’ rating on the the stock. 

The analyst note points out that it’s not certain when sailing will resume as the Centers for Disease Control and Prevention’s no-sail order is currently in effect through most of July. Norwegian voyages are canceled through June 30. 

The company’s competitor Carnival (CCL) recently announced plans to resume operating some cruises from three U.S. ports starting in August. Some analysts have questioned whether travelers will want to get back on cruises with no vaccine in place yet.

Morningstar’s bear case risk highlights: “COVID-19 headwinds could persist longer than expected and extended no-sail orders could further pressure profits, leading to added liquidity concerns as secular demand languishes.”

In May, Norwegian announced it had raised $2.4 billion to help strengthen its liquidity, enough to weather a worst-case scenario of 18 months without revenue.

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Ines covers the U.S. stock market from the floor of the New York Exchange. Follow her on Twitter at @ines_ferre

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