Could Smaller be Better for Investors in Norwegian Cruise Lines?

Norwegian Cruise Lines Holdings (NYSE:NCLH) reports earnings on July 9. If the reports from Royal Caribbean Cruises (NYSE: RCL) and Carnival Cruise Lines (NYSE: CCL) are any indication, investors should expect to see revenue approaching pre-pandemic levels and an improving earnings picture. 

That’s not surprising. The overall economic picture is still cloudy. But one thing is certain, consumers continue to prioritize experiences and travel. And that is playing out well for cruise lines who are seeing passengers returning at near the levels they were in late 2019. 

But does that mean that it’s time for investors to take the plunge on Norwegian Cruise Lines stock? That’s one question we’ll be addressing in this article. And the answer may come from the company’s decision to buck the industry trend. 

Norwegian is Charting Its Own Course 

I’ll guess you could ask ten cruise-going consumers what the best part of the experience is and you’d get ten different answers. That speaks to a calculated business decision by cruise lines. This is to create an on-board experience that truly offers something for everyone. 

This is leading to an arms race of sorts where cruise lines such as Carnival and Royal Caribbean are outdoing each other to create the biggest ships. The result is that cruise ships have become mini cities on the water. And for some travelers it may mean staying on the boat is more enjoyable than taking in the sights and sounds of the ports of call.  

Norwegian is taking a different approach. One that emphasizes space over size. According to the company, its latest fleet, the Norwegian Prima features “the most outdoor deck space of any new cruise ship...our most spacious accommodations and...first-rate service so you won’t wait a second for that second round.” 

Other highlights include: 

• 13 different suite categories that includes the largest three-bedroom suite of any new cruise ship 
• The company’s largest ocean view and balcony staterooms 
• The company’s largest ever bathrooms in standard rooms  
• More total pool deck space than any other ship in the NCL fleet 

Substituting Space for Size  

This isn’t to say that the ships are small exactly. Each ship is coming in at around 955 feet in length and can accommodate over 3,200 passengers. 

But that is significantly slimmer than Royal Caribbean’s “Wonder of the Seas” which is 1,200 feet long and can hold approximately 7,000 passengers.  

As I see it, the cruise line is calculating that in a post-pandemic world, consumers will prioritize personal space (and personal service) over having more things to do. The company is catering to a premium consumer and offering a cruising experience that passengers will perceive as being beyond the top-of-the-line ships from Royal Caribbean or Carnival.  

It may not be a formula that appeals to every traveler, but it does set the company apart. 

Should Investors Set Sail with Norwegian Cruise Line Post Earnings? 

Norwegian recently announced its intention to leave open a $1 billion commitment with funds managed by affiliates of Apollo Global Management through March 31, 2023. The company has not drawn on these funds nor does it plan to. However, it does illustrate that the cruise line industry in general is navigating uncertain waters. 

I tend to follow the investment advice of watching what consumers do more than listening to what they say. And right now, consumers are choosing to make up for lost time. A cruising excursion, for travelers so inclined, can be a cost-effective way of doing that.  

However, there is still a lot that’s unclear about the length, and severity, of this recession. While revenue is projected to exceed pre-pandemic levels as soon as next year, it’s a different story for earnings. Although the company is expected to be profitable in 2023, it is not forecasting a return to pre-pandemic earnings per share in the next five years.