Norwegian Cruise Lines Conservative Guidance May Be Overly Conservative

Stifel analysts maintained their Buy rating and $51 target price on Norwegian Cruise Line Holdings Ltd NCLH as management meetings reinforced its view that shares remain grossly undervalued and current levels offer an attractive entry point.

The company's early 1H 2017 booking commentary is encouraging, as pricing is up in the mid-single digits year-over-year on comparable occupancy levels, with first quarter metrics running stronger than 1H 2017 metrics.

"Even though 1H17 booking/pricing commentary has been healthy, investors don't believe booking/pricing momentum will be able to last through 2H17 for a number of reasons," analyst Steven Wieczynski wrote in a note.

Wieczynski believes NCLH's recently revised 2017 EPS midpoint of $4.08 is "overly conservative," as it implies comparable regional year-over-year growth rates as those embedded in the company's 2016 forecast.

Though over dependence on the North American source market could be a competitive disadvantage in 2017, the analyst expects better year-over-year result as cruise operators are effective in yield managing their businesses when provided adequate time.

In addition, Wieczynski sees potential upside opportunity from Caribbean in 2017 as supply growth is expected to remain rational and consumer demand continues to improve.

Moreover, the analyst said China is perceived to be the biggest growth opportunity over the next couple of years.

That said, Wieczynski isn't expecting a V-shaped recovery any time soon given investors doubts over management's credibility and pressures facing certain areas of NCLH's business. But, the analyst noted that NCLH is poised to benefit over time from favorable Caribbean supply/demand outlook, and emerging China growth opportunity.

On the valuation front, the analyst said shares continue to trade at "what we believe to be a ridiculously low 9.4x versus the industry's historical average range of 12x to 14x."

"[W]ith seemingly limited downside in the valuation from here and with what we view as a conservative reset in out-year expectations, we believe investors can begin to more aggressively add to positions, as our long-term positive stance on NCLH shares and the cruise group at large remains intact," Wieczynski added.