When it comes to cruise companies, Carnival and Royal Caribbean tend to grab most of the attention. Since these two companies account for the majority of the passenger count and revenue in this industry, that emphasis appears to make sense.
With that focus, Norwegian Cruise Line Holdings (NCLH -2.24%) often gets forgotten. According to Cruise Market Watch, the company claims about 9% of the passenger counts, making it the third-largest cruise line. Now, with Norwegian reporting profits and bookings at record highs, has the stock's time finally come?
The state of Norwegian
Three years after the company began to recover from pandemic-induced shutdowns, Norwegian again sails in smooth waters. Its ships are at 106% capacity (with 100% meaning two people in each cabin). Moreover, most of its bookings point to 2025 sailings. With that, Norwegian operates 32 ships and plans to add 13 ships by 2028.
Also, its financials reflect this improvement, with Norwegian reporting $4.6 billion in revenue in the first half of 2024, a 13% increase from the same timeframe last year. Additionally, it earned a net income of $181 million in the first six months of 2024. In the same year-ago period, it lost $73 million, as $349 million in interest expenses weighed on the company's financials.
After years of struggle, the stock has risen 7% over the last year. While that did not beat the S&P 500, it is a positive sign, considering the stock's drop of more than 60% over the last five years.
Ongoing challenges
Indeed, the legacy of the pandemic may have slowed the recovery of Norwegian stock. Even with its profits, interest expenses surged to $397 million in the first two quarters of 2024.
This is concerning because, like its peers, Norwegian had to rely on loans to keep its company in business during the pandemic, leaving it heavily indebted. It has made progress on reducing this burden, as its $13.4 billion in total debt fell from $14.1 billion at the end of 2023.
Still, total debt was only $6.8 billion at the end of 2019 before the pandemic began. Also, the $693 million in stockholders' equity indicates its current debt remains a crushing burden to the company.
Moreover, the current portion of long-term debt is just over $1.5 billion. Since Norwegian paid off $778 million in debt in six months, it is possible that the company could retire all of that debt without having to refinance.
Unfortunately for Norwegian, its debt repayment obligations will rise significantly after 2025. This means Norwegian will either have to dilute shareholders or refinance some debt, likely at higher interest rates. Such a situation bodes poorly for investors, and the need to refinance debt could rise if an economic downturn takes Norwegian back to losses.
| Norwegian Cruise Line-Scheduled Principal Repayments of Long-Term Debt | |
|---|---|
| Year | Amount (millions) |
| Remainder of 2024 | $1,070,650 |
| 2025 | $1,324,074 |
| 2026 | $2,240,090 |
| 2027 | $3,301,519 |
| 2028 | $1,708,911 |
| 2029 | $1,924,201 |
| 2030 and after | $2,190,104 |
Source: Norwegian Cruise Line Holdings 10-Q, Q2 2024, page 15.
Additionally, while its main rivals also carry massive debts, they are likely better positioned to address their obligations.
Carnival faces more than $30 billion in total debt but at least claims nearly $7 billion in shareholders' equity. Also, Royal Caribbean carries nearly $22 billion in total debt against $6.2 billion in stockholders' equity. Although both cruise lines face tremendous burdens, it places Royal Caribbean with the least debt relative to equity among cruise line stocks.
Should I buy Norwegian stock?
Despite its profitability and strengthening financials, the recovery of Norwegian stock appears uncertain. Admittedly, the rising profits, falling debts, and growing number of ships bode well for Norwegian. Also, the stock's financial position should improve as long as customers continue to book its cruises.
Unfortunately, much of its debt will likely mature faster than Norwegian can pay it off in the second half of the decade. Moreover, an economic downturn could derail its current success in retiring part of its debt.
Amid its barely positive stockholders' equity, the stock could also struggle if it faces an industry downturn, making it less likely to outperform its rivals.
