Norwegian Cruise Line Holdings (NYSE:NCLH) stock could get a nice boost sometime this fall if a Covid-19 vaccine finally gets approved by the FDA. However, keep in mind that this stock price jump might be from a lower price than today.
This is because it seems highly likely that the Centers for Disease Control and Prevention (CDC) could extend its present “No Sail” order beyond Sept. 30. That order was issued on July 16. Later on July 21, the CDC said it would not modify the order until it reads all public comments submitted up until Sept. 21.
This will affect any ship cruises out of the U.S. Although that may already be discounted in today’s price, I suspect that it will have another effect.
An extension will likely lead most investors to conclude that the CDC won’t lift the order until an FDA-approved and an efficacious vaccine is widely available. I wrote about this in a previous article on Carnival (NYSE:CCL).
At the time I wrote that I did not think that the company would be able to begin its U.S. operations before mid-January or February 2021. I think the same applies here, but with a difference for Norwegian Cruise Line stock: the company won’t need to raise any more capital.
Liquidity May Be Enough
As of June 30, Norwegian Cruise Line Holdings had $2.259 billion in cash based on its latest 10-Q filing. Since then the company said it raised $1.488 billion, consisting of $288 million in equity and $1.2 billion in debt offerings.
However, the company had to pay off some existing debt and refund customer deposits. As a result the cruise line now has $2.8 billion in liquidity as of July 21.
Norwegian said on Aug. 6 that its cash burn rate target is $160 million per month. Therefore, it will have $2.48 billion or thereabouts by the end of September. This number does not include inflows of new customer deposits and outflow of repayments of deposits.
Nevertheless, you can easily see that it will be plenty to get the company through at least one full year of no cash flow that would cost $1.92 billion. This is well less than the $2.48 in liquidity and leaves room for debt repayments which are just $337 million (current portion of long-term debt).
In other words, if all goes according to plan, and the CDC lifts the order for U.S. vessels in the first quarter, Norwegian has plenty of cash to survive through then. Even assuming it continues to burn cash for another six months after the No-Sail order restriction is lifted, the company will continue to survive with no liquidity issues.
That bodes very well for Norwegian Cruise Line stock. In effect, it should start to rebound once the vaccine is approved, and maybe even well before that happens.
Where This Leaves Norwegian Cruise Line Stock
I still refer potential investors in this stock and other cruise line stocks to the well-written article by MarketWatch’s deputy investing editor, Tomi Kilgore, who wrote that, “Cruise operators took a deep bruising from Covid-19, but history says they will recover.”
People have short memories. In 2019 a number of cruise industry mishaps occurred. But cruising remained popular overall and the cruise industry rebounded. Moreover, Kilgore cited more evidence cruise line clients remain loyal and understanding.
Right now analysts are still projecting negative earnings for Norwegian Cruise Line stock even for 2021, albeit at significantly lower levels. I suspect that positive earnings will not occur before 2022.
However, that does not mean the shares won’t move up beforehand. Investors will likely be willing to take a longer view once a Covid-19 vaccine is available.
Let’s do a simple estimate. From 2015 to 2019 the company made between $1.86 and $4.30 diluted EPS. The average of these is $3.08. Let’s take 75% of that number to be conservative, or $2.31, and apply a normal multiple.
Morningstar has a page that shows its five-year historical price-to-earnings ratio has been 17.58. Again, to be conservative, let’s apply a 25% discount, leaving it at 13.2x.
That leaves our projected target price for Norwegian Cruise Line stock at $30.49 per share. This is 72% above today’s price of $17.50. Even discounting it by 10% to the present for two years, or 82.64% of the price, leaves it at $25.20, or 42% above today’s price. That is a great potential ROI for most investors.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.