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Small Norwegian Cruise Line Making Big Waves

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It's been a little more than a year sinceNorwegian Cruise Line Holdings ( NCLH ) completed its initial public offering, joining two bigger cruise rivals in the public waters.

With 13 cruise ships, Norwegian is still a small fish in the cruise pond compared withCarnival ( CCL ) andRoyal Caribbean ( RCL ). But in some respects, Norwegian has been making bigger waves.

"It's got the strongest pricing power in the industry. It's got the strongest unit growth in the industry. And its earnings growth is higher," said analyst Harry Curtis of Nomura Securities.

Two new vessels entered Norwegian's fleet in the last year, including the January launch of the 4,000-passenger Getaway out of Miami. It followed last May's debut of the Breakaway, berthed in New York.

The two vessels pushed capacity up 23% in the first quarter from a year earlier, and -- along with new ships' premium pricing -- translated into a nearly fourfold spike in adjusted earnings per share and a 40% gain in adjusted operating profit. And revenue in the quarter rose 27.8% from a year earlier to $499.3 million.

Fresh Adventures

Owing largely to what management cited as its "young, modern fleet" and "earnings-rich new builds," Norwegian maintained its earlier forecast for a 60% EPS jump for 2014.

Not only are the newest ships loaded with restaurants, entertainment and other amenities to drive up onboard revenue, they're also more fuel-efficient, saving on one of the biggest costs.

Cruise lines were forced to discount last year after Carnival's highly publicized Triumph meltdown in the Caribbean; the ship had to be towed to port when an engine fire left it stranded at sea for days, while passengers shared their discomforting stories with the news media. Norwegian still logged a 45% increase in earnings for the year. Carnival earnings fell 16%.

Norwegian will soon get bigger with two more ships set to join its fleet, starting in the fall of 2015 with the 4,200-passenger Escape. The Bliss is scheduled to follow in February 2017.

However, size-wise, Carnival and Royal are giants compared to Norwegian. Carnival operates 10 brands from mass market to luxury. Some brands, such as Princess, have more ships than Norwegian's total fleet.

Norwegian CEO Kevin Sheehan views the cruise company's small size as a positive.

"We're more nimble," he said in a phone interview with IBD. "We can navigate and change strategies quicker, since we don't have as much corporate overhead to complicate things. We're all in the same room, working together."

Moreover, he says, Norwegian's ships -- all one brand -- are targeted to the "premium market." And that means they can command higher prices.

Premium Prices

Sheehan told analysts in an April 29 conference call that pricing in the first quarter was 800 to 900 basis points higher than rivals.

"If you look at the ticket pricing in the first quarter, I think we do stand out quite a bit," he said in answer to an analyst's skepticism.

The company's goal is to drive prices higher as it moves up the "pecking order of premium brands the next three to five years," Sheehan told IBD.

"We're learning that the more exclusive we make it, the more demand there is," he said.

Take The Haven, Norwegian's separate "ship-within-a-ship" luxury enclave for passengers seeking privacy and high-maintenance pampering. "It is one of the first areas to sell out," Sheehan said.

The Haven may accommodate only 2% to 3% of guests, but it generates two to three times more revenue, or around 6% to 7% of the total, he says.

Single Sailors

Lately, Norwegian has also been catering more to a segment largely ignored by the cruise industry: the solo traveler, who typically has to pay for a double cabin.

More than 100 solo cabins in separate areas have been designed into each of the last few ships. Solo enclaves will be included in new ships. The sections feature communal areas for socializing.

The large Caribbean cruise market has been tough, Sheehan admits. Industrywide discounting continued into the January-to-March "wave" season. Norwegian ended up taking discounts to fill cabins.

Sheehan put some of the blame on the lingering effects of last year's mishaps at other cruise ships.

"But things are starting to come back. I'm hopeful the other guys are starting to price better as well," he said.

Still, Norwegian notched down its 2014 forecast for net yield (net revenue per capacity day) a bit to 3% to 3.5%. The "modest decline," wrote Credit Suisse analyst Joel Simkins in a research note, "was respectable when factoring in intense competitor discounting in early 2014."

Norwegian expects to deploy 38% of its capacity in the Caribbean in the second quarter, 23% in Europe, 11% in Bermuda and 10% in Alaska, with the balance in Hawaii and other small markets.

Charting New Territory

Though Royal and some other cruise lines plan to move into China, Norwegian is still too small to make a bet there now, Sheehan says. But he adds that Asia could be on its planning map down the road.

The company plans to enhance its presence in Europe starting in the 2015/2016 winter season, when it moves Epic from its Miami base to Barcelona, Spain. Epic's move to Spain also allows for the Escape to enter the Miami-based Caribbean cruising market with minimal incremental capacity.

If investors were concerned about the lighter net yield outlook for 2014, they may have felt more positive when the company also announced a new $500 million share-buyback program.

Curtis of Nomura Securities thinks buybacks could start before the end of this year.

While returning some of the company's free cash to investors may be a positive sign, Curtis says that he remains concerned about the overhang related to the stock's liquidity and the potential for new shares entering the market when major stakeholders sell.

The public owns 45% of common shares, with the other 55% split between Genting Hong Kong and private equity firms Apollo Global Management and TPG Capital.

Sheehan figures that the two private equity firms will probably sell most of their positions in the next 12 to 18 months. "Private equity ownership has a finite life," he said. "They've been in the investment for seven years. They need to sell eventually."

"We've got a lot of investors who want to build positions but know selling is coming," he said, adding it makes for a "weird" situation.

It's unclear if and when Genting will sell shares. "We don't know. They're not very clear," he said.

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


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

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