There's a natural follow-up to my Tuesday column on Carnival Corp. (CCL) , courtesy of an announcement after Tuesday's market close by fellow cruise operator Norwegian Cruise Line Holdings (NCLH) . Norwegian is going back to the equity well as it announced the pricing of an offering of 40 million common shares. This comes on the heels of two other Covid-related stock offerings by Norwegian, one in May (42 million shares at $11) and the other in July (16 million shares at $15).
Tuesday's announcement has done what secondary offerings normally do -- sent the stock lower in response. The stock was up 3.5% on Tuesday to $22.06, but with the latest offering priced at $20.80 a share the typical downward adjustment is occurring.
Norwegian also has been no stranger to the debt markets during the pandemic; its debt has risen from $6.28 billion at year-end 2019 (September fiscal year) to $10.94 billion at year-end 2020. The company is sitting on a lot more cash now, $2.36 billion versus $407 million, which is the remnant of the capital raised to keep the company going while revenue plummeted to near zero.
I am a fan of cruises, and we have logged our past two on NCLH ships and would go again if and when we get the opportunity. However, just as in the case of Carnival, investors need to be careful with Norwegian Cruise Line, too.
It is important with NCLH to evaluate it through enterprise value, or EV (market cap plus debt minus cash), which is more encompassing than market cap alone. As investors, we sometimes tend to focus on market cap alone as an indicator of whether a stock is cheap. If a stock falls from $50 to $10, we may get excited and see it as too cheap to ignore. However, we need to look at the debt side as well, especially when there have been big changes in a company's capital structure.
Considering the influx of cash from Norwegian's latest secondary offering, I'd estimate its current enterprise value to be about $14 billion. At year-end 2019, its enterprise value was about $17 billion ($11.1 billion market cap, $6.3 billion in debt, $500 million cash). At that time, NCLH was trading at about $52 and there were 214 million shares outstanding. That year, the company also did $6.5 billion in revenue and earned $930.2 million, or $4.30 a share. That same net income, if achieved today, would result in earnings per share of $2.99 due to dilution.
To get to a $17 billion enterprise value under current circumstances would imply a stock price in the $29 range versus $52 at year-end 2019. That's the result of the dilution and a much higher share count (currently around 311 million, including Tuesday's offering), in addition to a higher level of net/debt. This ignores any additional cash burn that will occur, and we still don't know when cruises will resume or when Norwegian Cruise Line will return to profitability.
Money has been made on NCLH by some investors since the pandemic began, no doubt. Those souls brave enough to buy in March when shares fell below $9 or at either of the previous two secondary offerings have done quite well. However, the current valuation seems rich, presumes a rather fast return to normalcy and seems to ignore big changes in capital structure.
Cruise lines have done what they need to do in order to try and stay solvent and survive while they are shut down; this is the ultimate crisis. I hope the industry survives, and prospers.