The most profitable investment opportunities are often found in stocks affected by negative industry news. Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH), the third-largest cruise company globally, belongs in this category. The relatively young age of its fleet and its ability to leverage strategic relationships with casino partners drive Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH)’ industry leading ROAs. Norwegian Cruise Lines is an attractive investment candidate with the lowest PEG ratio in its peer group (0.76), but the highest ROA (3.9%).
The long and short of it
In the near term, a series of unfortunate accidents involving cruise ships operated by Carnival Corporation (NYSE:CCL) has cast a dark cloud over the cruise industry. It is easy to be distracted by negative news and to ignore numbers which show the bigger picture for the long term. According to the 2013 and 2012 industry reports issued by the Cruise Lines International Association, less than a quarter of people in the U.S. have ever taken a cruise vacation, and only 3.3% of Americans chose cruises as their vacation of choice in 2011. In my opinion, as the cruise industry moves to correct misguided perceptions about cost, entertainment, and even dress code (you do not have dress up in a suit and tie every night), and repositions cruises as a value-for-money travel choice, penetration rates of cruise travel will definitely increase.
Age is a differentiating factor
The age of a cruise company’s fleet impacts returns. Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) has the youngest fleet among its peers, with an average age of 8.1 years, according to its 2012 10-K. This metric excludes the completion of its newest ship Norwegian Breakaway in February this year, which will bring its average fleet down by approximately one year. In contrast, Royal Caribbean Cruises Ltd. (NYSE:RCL) disclosed in a December 2012 investor presentation that 15% of its fleet is more than 20 years old.. The key issue is whether the difference in fleet age translates to a superior return profile for the company with the younger fleet. Based on Yahoo! Finance data, Norwegian Cruise Lines delivered a ROA of 3.9% for the trailing twelve months, trumping an ROA of 2.6% for Royal Caribbean Cruises Ltd. (NYSE:RCL).
The early bird premium
Most people will have the experience of buying perishables at a supermarket sale and get back home to find that many of the items are near their expiry date. A similar situation happens in many industries including airlines and cruises. Cruise companies try to sell tickets as early as possible, to avoid lowering their margins with heavy discounting nearer to the cruise departure date. Besides having a younger fleet, Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) also achieves a higher ROA by securing more upfront bookings.
Cruising and casinos go hand-in-hand, with casino patrons an important source of customers for cruise lines. In addition, casinos typically reward high rollers and regular customers with various gifts, including redeemable cruise vouchers. Strategic relationships with major casino partners Caesars Entertainment and Genting Hong Kong allow Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) to market its cruises to these casino’s customers. Caesars Entertainment is an investee of Norwegian Cruise Lines’ backers Apollo and TPG, while Genting Hong Kong is a major shareholder of Norwegian.
Norwegian Cruise Lines‘ peers include Royal Caribbean Cruises and Carnival Corporation (NYSE:CCL).
Royal Caribbean Cruises’ aged vessel fleet remains its biggest problem. Royal Caribbean Cruises Ltd. (NYSE:RCL), like its peers, is always on the outlook for opportunities to optimize its fleet, including ordering new ships and selling old ones. In April 2013, it introduced its new generation of cruise ships – the Quantum class, which will come onboard in late 2014 and early 2015. Despite this, management expects the proportion of aged vessels above 20 years old to increase to 23% by 2016.
Notwithstanding its status as the largest cruise company in the world, Carnival’s reputation has been affected by recent power disruptions and passenger accidents. Investors will be advised to adopt a wait-and-see approach. If Carnival gets its house in order again by rebuilding its safety track record, it will likely catch up with Norwegian Cruise Lines in terms of ROA as it leverages its economies of scale.
Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) is the most undervalued of the three, with a PEG of 0.76; meanwhile Royal Caribbean Cruises and Carnival are valued at PEG ratios of 0.88 and 1.24 respectively. As mentioned above, Norwegian Cruise Lines also has the highest ROA of the peer group at 3.9%. Royal Caribbean Cruises and Carnival Corporation (NYSE:CCL) pale in comparison, delivering ROAs of 2.6% and 3.0%, respectively.
Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) should be able to sustain its industry-leading ROAs going forward, as it continues to maintain a young fleet with its new builds. It is not common to find a low-PEG, high-ROA stock during a peer comparison exercise, so investors should consider this stock.
The article Ignore the Noise and Cruise Ahead With This Stock originally appeared on Fool.com and is written by Mark Lin.
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