Norwegian Cruise Line (Nasdaq:NCLH), the third-largest cruise line operator in North America, went public Jan. 17 at an initial public offering (IPO) price of $19. In its first day of trading it gained 31%, closing at $24.79. Assuming the underwriters exercise their over-allotment of 3.53 million shares, Norwegian will receive net proceeds of $477.6 million, which it will use to pay off debt. With the quick gain right out of the gate, I'll look at whether its shares are a buy, sell or hold.
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Genting Hong Kong
The Lim clan is one of Malaysia's wealthiest families. Through the Genting Group it controls all sorts of leisure and hospitality businesses around the world. In 2000, Genting Hong Kong, which is 54.4% controlled by the Lim family, acquired Norwegian for $1.6 billion. Eight years later it sold 50% of the company to Apollo Global Management (NYSE:APO) and TPG Capital together for $1 billion. After the IPO, Genting will retain 43.4% of the company, Apollo and TPG the same, with the IPO investors holding the remaining 13.2%. Based on its Jan. 18 closing price, Genting Hong Kong's investment is valued at $2.2 billion, which puts its current return on investment from 2000 to today at an annualized rate of 5.5%. While that might not seem all that great, the SPDR S&P 500's (ARCA:SPY) annualized return is 2.2% over the same period. It's done just fine.
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Norwegian's third-quarter results were a thing of beauty. Highlights included net revenues increasing by 1.8% to $498.4 million, operating income up 8.8% to $174.1 million, and net yield (gross revenue less commissions, transportation and on-board expenses per available passenger cruise day) up 2.2% on a constant currency basis. That's 210 basis points better than Royal Caribbean (NYSE:RCL) and 430 basis points better than Carnival (NYSE:CCL). When Norwegian announces earnings for its final quarter of 2012 sometime in the next couple of weeks, it will report the best numbers in its 46-year history. Certainly, they hold up well in comparison to its two peers.
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Norwegian announced in October that it had reached an agreement to build its biggest cruise ship ever for delivery in the fourth quarter of 2015. Dubbed "Breakaway Plus," the new ship will be 163,000 gross tons with room for approximately 4,200 passengers. Norwegian also has an option to order a second ship for delivery in the spring 2017. The contract cost to build the ship is a whopping $898.1 million. At the end of September, Norwegian's ships had a weighted-average age of 7.9 years. With two slightly smaller ships (that will accommodate 200 passengers fewer) set for delivery in April 2013 and January 2014, it will have the youngest fleet in the cruise industry.
The only downside to Norwegian's numbers seems to be its debt-to-revenue ratio, which is higher at 126% than either of its larger peers. However, everything else about its financials is excellent. Its EBITDA margin for the trailing 12 months ended Sept. 30 is 24.5%, 310 basis points higher than Carnival and 500 basis points higher than Royal Caribbean. With the 31% opening-day increase in price, its enterprise value is now 14 times EBITDA, higher than either Carnival or Royal Caribbean, though not by a huge amount, and certainly reasonable given its current profit picture relative to its peers.
The Bottom Line
I like what Norwegian is doing with its business; it appears those who enjoy cruising do too. The company has a bright future ahead of it, so if you bought shares in the IPO, I'd be inclined to advise you hang on to them because the downside appears limited. On the other hand, if you're interested in making an investment in the leisure industry, Norwegian's shares appear attractive looking three to five years out. Normally, I'd say wait for its shares to fall back to earth sometime in the next 12-24 months; however, I'm not sure they're going to drop below $19 anytime soon. Buying around $21 or $22 would seem to be a good compromise.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.