Without Revenue, There’s Little Reason to Dabble in Norwegian Cruise Line Stock

After releasing its first-quarter 2020 earnings report, shares of Norwegian Cruise Line (NYSE:NCLH) are up over 4% in early morning trading. The company’s earnings and revenue came in below analysts’ expectations, but by now all investors are hoping for is news that is less bad from cruise lines and other travel stocks.

In that regard, Norwegian delivered. The company is expressing confidence that they can survive for 18 months with zero revenue. At the same time, the cruise line is expressing confidence that they will start seeing demand return by the fourth quarter. 

Norwegian Got a $2 Billion Lifeline

It appears that Norwegian was able to obtain all, or most, of the $2 billion in equity funding it was seeking. In late April, the cruise line was expressing concern that it might have to file for bankruptcy.

But while that’s great news for consumers who may have been concerned about not getting their refund from a canceled cruise, it’s less exciting for investors. The only questions that really matter for investors are when will Norwegian start earning revenue? When they do, at what level will that revenue arrive? And finally, will Norwegian ever get back to pre-pandemic levels?

Perception Shapes the Reality of Many Would-Be Cruisers

Cruise ships have always put some guests at risk for the transmission of a virus. In fact, a cruise ship’s reputation as a “floating petri dish” was often linked to its association with the gastrointestinal illness known as norovirus. However, according to the Centers for Disease Control (CDC) that concern may be overstated.

Out of 74 million passengers that sailed on cruise ships that were in the jurisdiction of the CDC’s Vessel Sanitation Program, only 129,678 passengers met the critieria for acute gastrointestinal illness and an even smaller number (1 in 10) were actually part of a norovirus outbreak.

And the way travelers can guard against the norovirus are similar to the guidelines that are being issued to protect against the novel coronavirus that has spawned Covid-19. That is washing your hands, keeping your hands away from your mouth, and not sharing food.

The Paradox of the Cruise Industry

For all of the people who have never taken a cruise, there are just as many, if not more, who love cruising. In fact, many people cruise once or more every year. And there’s a reason for that. Cruise ships have become cities unto themselves. If you can imagine an activity, you can probably do it on a cruise ship.

And while cruise ships have a reputation for being social meccas, you can be as isolated or as communal as you want. A cruise ship truly is a way for an individual to choose their own adventure.

And many cruise lines, such as Norwegian, offer loyalty programs that encourage repeat business. That loyalty, however, is going to be put to the test in a significant manner.

To begin with, shortly after the Covid-19 pandemic shut down the entire cruise line industry, it became apparent that several cruise lines were understating if not outright misrepresenting the threat the novel coronavirus presented to passengers. Since cruises have been cancelled, many customers are finding it difficult to get their money refunded.

And the financial difficulties of the cruise lines are bringing to attention what many have always known about the cruise lines. While they may have a home address in the United States, they frequently avail themselves of an obscure section of the U.S. tax code. This allows them to fly under the flag of a foreign country, a practice known as flying a “flag of convenience.”

While it may be convenient for them, not so much for the United States as many companies like Norwegian use this to skirt U.S. tax laws. But it also has the effect of letting them bypass U.S. unemployment laws.

When Will Customers Come Back

If you believe Norwegian, demand for cruises is starting in the fourth quarter and accelerating through 2021. "We continue to experience demand for voyages further in the future across our three brands," Chief Executive Officer Frank Del Rio said in the statement that accompanied the company’s earnings report.

But that statement leaves two big questions to be answered. First, how many of these “bookings” are merely rescheduled cruises that were cancelled. And second, will these customers actually set sail with the cruise line? These are harder questions and the answers don’t just boil down to safety.

One of the issues facing the airline industry is the fate of international flying. What if a city that you’re visiting suddenly shuts their borders to deal with another outbreak? What if entire cities remain inaccessible to foreign travel for more than a year?

Those same issues confront the cruise line industry. But whereas the airline industry can make up some of its revenue from domestic flights, the same can’t be said for cruise lines.

You can wait on Norwegian stock

Norwegian Cruise Line stock isn’t going anywhere. And that’s both good and bad. It’s bad for investors who are looking for growth in 2020. However, it’s good news because investors shouldn’t worry about FOMO (fear of missing out). You can wait to see if the bookings that Norwegian is forecasting turn into actual passengers who are taking an actual cruise.

I look at the future of cruising much like I view the future of air travel. It will be different. How different is not completely clear. But it will be different. However to get from point A to point B is going to take time and money.

In fact, one of the largest problems for the cruise lines is the sunk costs in their existing fleet. Norwegian is negotiating reductions or deferments in approximately $170 million in new ship construction. But this means any safety protocols will have to be retrofitted to an existing design. And that may be more expensive than just rethinking the cruise ship experience entirely.

I believe there is an opportunity for cruise lines to rethink a new future. But that future is several years away. In the meantime, I see a lot of reinvestment, and not a lot of growth. You can pass on Norwegian stock until it is sailing on smoother seas.