What a time it’s been for Norwegian Cruise Line. In the past six months alone, the company’s stock price has increased by a massive 57.3%, reaching $26.60 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Norwegian Cruise Line, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.We’re glad investors have benefited from the price increase, but we're cautious about Norwegian Cruise Line. Here are three reasons why we avoid NCLH and a stock we'd rather own.
Why Do We Think Norwegian Cruise Line Will Underperform?
With amenities like a full go-kart race track built into its ships, Norwegian Cruise Line (NYSE:NCLH) is a premier global cruise company.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Norwegian Cruise Line grew its sales at a sluggish 8% compounded annual growth rate. This was below our standard for the consumer discretionary sector. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Norwegian Cruise Line, its EPS declined by 23.5% annually over the last five years while its revenue grew by 8%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Norwegian Cruise Line’s $13.41 billion of debt exceeds the $332.5 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $2.34 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Norwegian Cruise Line could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Norwegian Cruise Line can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Norwegian Cruise Line, we’ll be cheering from the sidelines. After the recent surge, the stock trades at 14.1× forward price-to-earnings (or $26.60 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d suggest looking at Wabtec, a leading provider of locomotive services benefiting from an upgrade cycle.
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