Norwegian Cruise Line Is On A Roll: Who Needs Vegas?

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The Norwegian Breakaway will set sail in May on its maiden voyage to Bermuda with three Broadway shows, New York's famed Rockettes and a send-off from Cardinal Timothy Dolan.

"Cardinal Dolan has agreed to bless the ship," said Kevin Sheehan, CEO ofNorwegian Cruise Line ( NCLH ), the suddenly hot operator of the 4,000-passenger vessel.

It'll be the largest cruise ship to berth in the Big Apple and the first of up to four new megaships Norwegian plans to launch over the next four years.


The Norwegian Getaway will be the next to sail early next year, from Miami.

Miami-based Norwegian is building new megaships for the North American market as other cruise lines are pulling back their building programs.

Meanwhile, its stock is hot, having soared 60% since the firm's initial public offering in January.

"Norwegian is coming in with new ships when other lines are slowing growth in North America," said Cruise Week editor Mike Driscoll. "So there's a little opening for them to grow and not face a lot of other new ships."

Norwegian, which will have 12 ships counting the Breakaway, is much smaller thanCarnival ( CCL ) andRoyal Caribbean ( RCL ), which dominate the cruise industry. But it claims a younger fleet.

"Following capacity growth of 6% to 10% a year for most of the millennium's first decade, the industry is headed for just 2% to 4% growth over the next three or four years," said Matthew Jacob, cruise industry analyst with ITG Investment Research.

"That's as low as it's been for at least 15 years," he said.

Breakaway Sales

Norwegian is growing much faster. But with recent high-profile cruise accidents, is this a good time to be rolling out new cruise ships? Norwegian thinks so.

"(The Breakaway) is selling extremely well and at a faster pace than any other ship we've ever launched, and at significantly higher prices," Sheehan said in a phone interview.

Norwegian says fallout from Carnival's disabled Triumph last month has been minimal and short-lived. Royal Caribbean stated in a recent filing that it, too, hasn't seen bookings hurt in the few weeks after the Triumph debacle.

Carnival, however, said earnings would take an 8- to 10-cent per-share hit in the first half of 2013.

Carnival's stock fell nearly 2% Thursday after the Carnival Dream was stuck in port at St. Maarten with more than 3,000 passengers prohibited from disembarking after the ship suffered interruptions to elevators and restroom services.

Carnival is arranging for the passengers to fly home.

The cruise industry was impacted after the Carnival-operated Costa Concordia tipped over off the coast of Italy in early 2012, causing 32 deaths.

"That arguably was the industry's worst accident since the Titanic," said Jacob.

The cruise industry was forced to discount heavily to fill cabins, especially in Europe. Average pricing, Jacob says, was down at least 10% last summer.

"The industry is well on its way to recovering, and pricing is bouncing back from last year," Jacob said.

Even Mediterranean cruise demand is said to be improving a bit this year. It had dropped off the last few years as Libya exploded, Arab Spring uprisings spread in North Africa, and Egypt and Athens erupted in riots, Driscoll says. Then came the Concordia disaster.

With less exposure to the European cruise market than Carnival and Royal Caribbean, Norwegian hasn't been as affected by the region's problems.

Though it targets the North American market, Norwegian offers itineraries to the Caribbean, Bermuda, Central America and the Mediterranean in addition to North American routes.

It's the only major cruise line to operate inter-island Hawaii cruises that start and end in Hawaii, through its Pride of America.

Carnival and Royal Caribbean have multiple cruise brands vs. Norwegian's one broad-market brand.

Carnival, for example, has six cruise lines from budget to luxury: Carnival, Costa, Cunard, Holland America, Princess and Seabourn.

Having the entire fleet in one broad-market brand helps Norwegian drive higher onboard revenue per capacity day and higher margins than operators with a mix of brands, wrote UBS Securities analyst Robin Farley in a recent initiation report on Norwegian.

Norwegian "hews to the upper center," writes Frommer's Cruise Guides, which says its passengers are "younger and more active" than those of other lines most similar to it.

As gigantic as the Breakaway is, it won't be Norwegian's largest ship. That honor goes to the slightly larger 19-deck Epic, which launched out of Miami in June 2010, looking like a floating high-rise condominium as it lumbers out of port with 4,100 passengers and 1,750 crew members.

New ships typically fetch premium prices because they're, well, newer and splashier. And they're more efficient, an important factor now that fuel has become a cruise ship's biggest cost. "Our margins will continue to improve as we build these new ships," Sheehan said.

18 Quarters Of Growth

Norwegian has ticked off 18 straight quarters of earnings gains, even during the economic downturn and when oil prices hit $160 a barrel, he says.

In the fourth quarter, the first reported as a publicly traded company, the cruise operator posted $5.6 million in net income, or 4 cents a share, with net yield up 2.5% from the prior year.

Analysts expect earnings to grow 37% this year to $1.33 a share and go up 65% in 2014, according to Thomson Reuters. Revenue is seen growing 14% this year to nearly $2.6 billion and 21% in 2014.

Sheehan credits a management and operational shakeup begun more than five years ago for the financial turnaround at the 43-year-old cruise company.

That was afterApollo Global Management ( APO ) and TPG Capital invested $1 billion, taking a 50% stake, leaving owner Genting Hong Kong with the other 50%.

After the recent IPO, Genting kept 43%, while Apollo retained 33% and TPG 11%. The public owns the rest.

Many of the new managers, including Sheehan, came from outside the cruise industry. Sheehan was previously CEO of Cendant's vehicle service division.

"We took a look at everything," Sheehan said. "A big part of it was passion and getting the culture right."

The team trimmed a few older ships from the fleet. They also revamped marketing to highlight the company's pioneering "freestyle" vacation format, which lets passengers choose from among multiple dining and entertainment venues.

Taking advantage of Apollo's and TGI's ties with gaming operatorCaesars Entertainment ( CZR ), Norwegian partners with Caesars on promotions to draw casino customers to its ships.

With onboard casinos, theatrical shows, music acts such as the Blue Man Group, a ton of restaurants and an aqua park, one ad for the Epic says, "Who needs Vegas?"



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 , CZR , NCLH , RCL

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