I f it's true that a rising tide lifts all boats, then it stands to reason that an ebb tide does the opposite.Norwegian Cruise Line Holdings ( NCLH ) and other cruise ship operators found that out Sept. 22, whenCarnival ( CCL ), the largest U.S.-based operator, reported fiscal third-quarter earnings and gave Wall Street reason to worry.
Carnival beat analysts' consensus estimates but offered a disappointing EPS outlook for the fourth quarter and full year, sending its stock price down 5.5% for the day.
Rivals Norwegian andRoyal Caribbean Cruises ( RCL ) followed suit, ending the day down 3.4% and 4.9%, respectively, though part of the problem was an overall market sell-off. All three stocks have since regained some of their buoyancy.
Wall Street's initial reaction to the Carnival earnings report was partly based on ticket pricing trends, says Morningstar analyst Jaime Katz.
"Carnival said its bookings were better than last year as far as occupancy goes, though pricing was a little weaker," Katz said. "A lot of investors looked at that as a negative."
For Norwegian, the brief stock decline in September and again in the last few days have been rare setbacks in a pretty good run.
Trading On The High Seas
The company operates 21 ships under the Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. It offers about 430 destinations within many itineraries worldwide.
Its stock price set a new high of 63.22 on July 31 and has been trading near there for most of September. Shares are up about 23% since the beginning of the year. Norwegian has a best-possible IBD Composite Rating of 99, putting it atop the Leisure-Services group.
Financially, the company has run off nine straight quarters of double-digit or better revenue and earnings growth. That streak should continue when it reports third-quarter results, likely in late October or early November.
What Investors Should Expect
Analysts polled by Thomson Reuters expect Norwegian's Q3 adjusted earnings to rise 21% from the prior year to $1.34 a share. Revenue is seen climbing 41% to $1.28 billion.
What should investors pay attention to when Norwegian does report third-quarter results?
"We'll be looking at whether Norwegian is seeing the same trends as Carnival," Katz said. "Are ships filling up earlier? Are they able to leverage pricing?"
Although Norwegian and Carnival operate in the same industry, there are important difference between the companies, Katz says. One of them is the target customer. Those at Norwegian tend to have and spend more money than those at Carnival.
"The Carnival brand is much lower priced than at Norwegian," Katz said. "Norwegian has a much different end user who is much less sensitive to economic cycles."
Norwegian moved into the high-end market in a big way last year, when it acquired Prestige Cruises International for about $3 billion. Prestige was the market leader in the upscale cruise segment and brought aboard Oceania Cruises and Regent Seven Seas Cruises.
The deal, which closed in November, expanded Norwegian's portfolio of brands across all market segments in the cruise industry, from contemporary (Norwegian) to upper-premium (Oceania) to luxury (Prestige).
On a Q2 conference call, Norwegian CEO Frank Del Rio said there is "minimal overlap" among the brands, "meaning we do not compete against ourselves in the marketplace. We believe that our organizational structure and brand mix are unique in the cruise industry."
Adding Up The Synergies
In a note following Norwegian's earnings report, JPMorgan analyst Kevin Milota called the Prestige integration "substantially complete." He also said Norwegian reiterated its $75 million synergy estimate for 2015, composed of $30 million in revenue and $45 million in cost synergies -- $20 million of which "is earmarked for reinvestment."
"For 2016, the company has identified $125 million in synergies, of which about $40 million will be reinvested," Milota noted.
The Prestige business has had a big impact on Norwegian's top line. Year-over-year revenue has grown at least 41% during each of its first two full quarters after the buyout closed. Only once during the prior 10 quarters had the company logged a sales gain above 20%.
Its First $1 Billion Quarter
Norwegian posted Q2 revenue of $1.09 billion -- the first time it has topped $1 billion in a single quarter. That was up from $766 million a year earlier, though it fell short of analysts' consensus. Earnings climbed 29% to 75 cents a share, topping views.
On the conference call, CEO Del Rio said Norwegian has made progress on plans to expand operations in several markets, including Australia, New Zealand, Europe and Asia, where the Norwegian brand will return following a 15-year hiatus.
"We continue to evaluate the opportunity to offer Asian-centric product geared toward consumers in the region, particularly those in China," Del Rio said. "We have the benefit of learning from the industry's initial entry into the market and are building our intelligence and crafting a strategy for the best way to enter the market."
Perks, Yes; Discounts, No
Del Rio, a former CEO of Prestige, took over as Norwegian's CEO in January. Since then, he has become a vocal advocate of firm pricing policies that shy away from discounts, analyst Katz says.
"(Del Rio) has really articulated very well how they feel about pricing and discounting," she said. "They have a willingness to make concessions on some things, such as throwing in perks when passengers are on board, but not on a pricing level."
Analysts are bullish on Norwegian's financial prospects over the next couple of years. Those polled by Thomson Reuters expect the company's full-year EPS to rise 27% this year and another 34% next.