New Ships Let Norwegian Cruise Line Battle Big Rivals

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Norwegian Cruise Line may be No. 3 in the cruise industry after Royal Caribbean Cruises and mishap-ridden Carnival, the largest.

But it's making up for its smaller size with a splashy rollout of new ships in North America. This comes at a time when the industry hasn't been adding much new capacity in the region.

In May, Norwegian's 4,000-passenger Breakaway launched cruises out of New York, which helped boost the company's third-quarter net revenue nearly 20% year over year to $596 million and adjusted earnings 19% to 86 cents a share.

The new ship, brimming with perks such as Broadway shows, enjoyed premium pricing and relatively high levels of onboard spending by passengers.

A sister ship, the Getaway, could provide even more rewards when it sets sail out of Miami for Caribbean locales early next year.

It'll be the largest cruise vessel to use Miami as its home port year-round.

"This is a big deal," said Mike Driscoll, editor of newsletter Cruise Week. "The Caribbean is the biggest cruise market by far in North America andNorwegian ( NCLH ) is finally at the stage where it can compete head to head in the national market."

Foothold In Florida

While the New York-based Breakaway attracts a lot of customers driving in from the Northeast, the Getaway's Miami base for Caribbean voyages draws customers from across the country, he says.

Carnival ( CCL ) andRoyal Caribbean Cruises ( RCL ) have long operated year-round cruises to the Caribbean from Florida. But Norwegian hasn't run year-round cruises from Miami in more than 10 years.

With its two new ships sailing from New York and Miami to cruise-popular Caribbean ports, Norwegian expects 2014 earnings to grow 60%, driven in part by an expected net yield of more than 4%, despite heavy promotions by rivals.

Analysts polled by Thomson Reuters expect 2014 earnings to grow higher than that. For this year, they see profit rising 43% to $1.39 a share. In the first quarter's busy "wave" season next year, they expect EPS to jump 283% to 23 cents.

New ships command double-digit premiums, CEO Kevin Sheehan said in a conference call after Norwegian's third quarter report.

"We want to continue to push on pricing and keep a careful eye, of course, on the load," he said.

Meanwhile, Norwegian has worked to bolster its balance sheet by lowering the cost of debt via redemptions and refinancing of high-rate notes. In the third quarter, interest expense fell 44% to $26.6 million from $47.2 million a year earlier. Its cost of debt at the end of the quarter was under 4% vs. 6.6% at the end of December 2012.

Norwegian is majority owned by Genting Hong Kong,Apollo Global Management ( APO ) and TPG Capital, so the public float is relatively small.

Late Monday Norwegian announced the majority shareholders will sell 22 million ordinary shares in a secondary offering. A 30-day option will be granted to underwriters to buy up to 3.3 million additional shares. Norwegian won't sell any shares in the offering nor receive any of the proceeds.

Beyond the Breakaway and Getaway two even larger ships, the Norwegian Escape and Norwegian Bliss, are set to be delivered in 2015 and 2017 respectively. New vessels, more fuel-efficient than older models, should continue to support growth in earnings and return on invested capital, analysts say.

Meanwhile, as Norwegian expands its fleet, global industry capacity growth is expected to slow to 3.6% for 2013 to 2016 vs. the more than 6% annual growth from 2003 to 2012, Wells Fargo analysts noted.

Carnival Faces 'Difficult Year'

While Norwegian is steamrolling ahead on the heels of its January public offering, Carnival is trying to recover from a series of mishaps.

Analysts forecast that Carnival's earnings will fall for the third straight year this year. Carnival expects net yield to be down 3% to 4% in the first half of 2014.

"Carnival is clearly having a difficult year," Driscoll said.

Rather than cruise with Carnival's more upscale Holland or Princess brands, many would-be customers turned off by Carnival's headline-grabbing problems at sea have signed on with Norwegian or Royal Caribbean, UBS analyst Robin Farley noted in a recent report.

Norwegian, relying on just one ship brand, skews to a higher-end demographic than the mass-market Carnival brand, observers say.

Demand for cruises fell after Carnival-operated Costa Concordia tipped over after hitting rocks off the coast of Italy in early 2012. The industry was starting to recover when Carnival's Triumph lost power in the Gulf of Mexico early this year, a top-of-the-news event that left more than 3,000 passengers to cope with no power and overflowing toilets.

Driscoll says Norwegian and Royal Caribbean "could have done better this year if it weren't for the negativity surrounding the Triumph."

"Barring another Black Swan event, the industry really should do pretty well next year," he said. "But it's hard to tell now because this is not a heavy booking period. You really won't know until January."

That's when the cruise industry's three-month promotion-heavy "wave" season begins.

Even Europe's cruise business, which was especially impacted by the Concordia accident, is on the mend. Norwegian plans to deploy about 20% of its fleet in Europe in 2014, about the same as this year. Sheehan said in the last conference call that pricing "has been a positive" and that "we're feeling pretty good about Europe right now."

Other cruise lines are adding capacity in Europe. Royal Caribbean's Anthem of the Seas is expected to enter service in Southampton, England, in 2015.

Norwegian says that 55% of its capacity will be in the Caribbean in the fourth quarter, with cruises leaving from Tampa, Fla.; Miami; New Orleans and New York.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: APO , CCL , NCLH , RCL

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