Rough Waters Ahead? UBS Downgrades Norwegian Cruise Lines Due To Inflation Pinch

Norwegian Cruise Line Holdings Ltd NCLH has moved 30% to the upside within six months as the demand environment for cruises is improving.

However, analysts at UBS believe the risk/return is skewed less favorably on the stock and downgraded it to Neutral on concerns that the company won’t be able to reduce its expense growth in 2023.

The Analyst: UBS downgraded Norwegian Cruise Line from a Buy, to a Neutral rating, and reduced the price target from $24.00, to $19.00.

The Takeaways: Analysts at UBS are concerned with Norwegian’s cost performance after the company guided a 46% increase in expenses — against 2019 — for the fourth-quarter.

See Also: Looking Into Norwegian Cruise Line's Return On Capital Employed

“Even if NCLH can do better than mid-teens growth in expense ex-fuel in 2023 compared to 2019, the +17% growth in capacity should be bringing better scale to bear, in our view,” UBS analysts said in a note to investors Tuesday.

UBS noted that Norwegian may be feeling the pinch of inflation more than its competitors, and lowered its target multiple on the stock, as other cruise lines have said they aren’t experiencing wage-pressure.

“Given the increased uncertainty in the expense and therefore EBITDA outlook for 2023, we are lowering our target multiple to 10x, below the pre-pandemic 12x multiple we had been using – to a range that includes some pandemic timeframe, to better reflect the more challenging capital structure post-pandemic.

Additionally, Norwegian doesn’t have the benefit of having sold any older ships during the pandemic, as the company had the youngest fleet.

Final Word: UBS’ previous target EPS of $2.41 is unchanged, but the firm noted it sees more downside than upside on the stock.

NCLH Price Action: Shares of Norwegian Cruise Line Holdings Ltd are trading 4.14% lower Tuesday to $14.82, according to data from Benzinga Pro.

Read next: Inflation Slows Significantly In November, Sending Stocks Higher

Photo by Bernd Dittrich on Unsplash