Morningstar | Norwegian Shuffles Fleet Deployment to Optimize Profits; Shares Undervalued
Given the slow adoption of traditional cruising in China, we don’t find narrow-moat Norwegian’s redeployment of the Joy out of the market as worrisome. Furthermore, we don’t see a downsizing of ships in the China region as a lack of commitment to the market but rather an opportunity to grow capacity with market demand . In response to local market conditions, the firm plans to move the Joy (deployed initially in 2016) from Shanghai to Seattle in spring 2019 after investing $50 million to incorporate amended features on the ship. In turn, the Spirit (2,000 person capacity) will relocate to the region in 2020 after undertaking its own revitalization. This implies Norwegian will have no hardware in the region between Spring 2019 and Summer 2020, although Jade’s reallocation to Asia-Pacific should offer some stops in Hong Kong.On the heels of this redeployment of assets, Norwegian expects to earn an incremental $0.30 in 2020 earnings per share and sees a modest benefit from the shuffling in 2019. We perceive this as a mix shift benefit rather than a change to fundamentals of the business and as such plan to keep our long-term average yield growth of around 2.5% intact. Additionally, despite fuel and foreign exchange headwinds, the firm plans to raise its 2018 EPS outlook when it reports its quarterly results (Aug. 9), thanks to strong demand. Not only are occupancy and pricing ahead of last year for both the second half and 2019, but management noted that gains in both metrics have “accelerated†since May’s filing. Our EPS forecast of $4.71 for 2018 was already ahead of the company’s $4.55-$4.70 2018 guidance, and our 2020 EPS outlook of $5.81 is $0.23 ahead of consensus of $5.58 (the company doesn’t have an explicit 2020 EPS goal). Even with modest positive changes to our model we don’t plan any material change to our $69 fair value estimate and view shares as undervalued, trading at a 25% discount and at 11 times 2018 EPS.
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