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Goldman upgrades but trouble brews in the Caribbean

Year-to-date, NCLH has fallen 15%, compared with CCL’s -7% and RCL’s +8%.   Why the underperformance despite two new ships serving the Caribbean market, the highest projected yield growth in the industry for 2014, highest % of buy ratings in the industry at 86% (including GS’s buy upgrade last night) with no sell ratings, and a bullish CEO?  One can blame the Genting overhang of potential stock sales, but that would be missing the big picture.  Caribbean discounting concerns are real and it’s not abating for NCLH, at least in the short-term.

Norweigan reports Q1 earnings next Monday after the bell.  As we pointed out in our last cruise survey, “CRUISE PRICING SURVEY: DICEY Q2” (04/04/14), Norwegian’s Q2 guidance could miss Street expectations.  We currently forecast 3% net yield growth at $0.52 EPS for Q2.  Q1 should be ok (HE: 4% net yield, $0.24 EPS) since results are boosted by the introduction of Getaway in February.  However, sell-side estimates go as high as 6.5% net yield growth for Q2.  NCLH’s 4% FY net yield growth guidance seems aggressive.  If FY 2014 EPS guidance is to be met, we think it would have to be on the cost side; otherwise, expect a guidance cut.

Our latest pricing survey, conducted on April 21st/22nd, confirms our bearish stance on NCLH (we’ll have more survey commentary in a separate note).  Caribbean pricing trends worsened for the Norwegian brand in late April bringing overall pricing lower, as seen below.  The Caribbean accounts for 56% of NCLH’s total capacity in 2014, up 6% points over the previous year.

NCLH:  THE WEAKEST LINK - NCLH1

We also think it’s important to clarify something mentioned often by the frustrated bulls - steady new ship premiums.  For the most part, we agree but a closer look shows it is because of price discounting across all ships.  We believe it is most insightful to compare Getaway and Breakaway with its peers in their respective markets –Miami and New York City.  As the charts below show, the new ship premiums have been relatively consistent with lower and lower prices, although the recent Breakaway discount in Q2 is pretty ugly.  

NCLH:  THE WEAKEST LINK - NCLH2

NCLH:  THE WEAKEST LINK - NCLH3

NCLH:  THE WEAKEST LINK - NCLH4
 

 NCLH:  THE WEAKEST LINK - NCLH5

 NCLH:  THE WEAKEST LINK - NCLH6