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Norwegian Cruise Beats Earnings Estimates but Revenue Miss Sinks Shares: Why the Disconnect?

 
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Summary

 
•  
Norwegian Cruise Line reported its first profitable quarter since 2019 pandemic disruptions
 
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Q1 EPS of $0.16 topped estimates of $0.09, driven by strong cruise demand
 
•  
Raised FY2024 EPS outlook to $1.32 from $1.23 on record booking volumes
 
•  
Shares fell 14% as revenue miss sparked economic growth concerns
 

Norwegian Cruise Line (NCLH) sailed back to profitability in Q1 2024, but the cruise operator's earnings report failed to impress investors. Despite returning to the black for the first time since 2019 and raising full-year guidance, shares plunged 14% on Wednesday. The revenue miss overshadowed the positives, reigniting worries about consumer spending amid economic uncertainties.

 

Cruising Into the Black Again

 

For the first three months of 2024, Norwegian Cruise posted earnings per share of $0.16. This solidly beat Wall Street's expectations of $0.09 EPS. It also marked a significant turnaround from the $1.07 per share loss in Q1 2023 at the depths of the pandemic's impacts on the cruise industry.

 

The company benefited from a continued boom in cruise demand as travel rebounded. Norwegian reported record bookings for the quarter, allowing it to push through higher pricing. Revenue per passenger cruise day increased 8% year-over-year.

 

Full Steam Ahead, But Hitting Headwinds

 

Even with the return to profitability, Norwegian's Q1 performance failed to wow investors. Total revenue of $2.19 billion missed analysts' average estimate of $2.23 billion. This slight miss on the top line was enough to raise fears that consumer appetite for cruises and vacations may be waning amid recession risks.

 

CEO Frank Del Rio acknowledged some emerging headwinds in the company's earnings release: "While the Wave cruise booking period exceeded expectations...there has been some slippage in recent weeks, likely reflecting consumer uncertainty about the economic environment, which we are watching closely."

 

That said, Del Rio remained optimistic that 2024 would be a year of continued growth and recovery coming out of the pandemic. Norwegian raised its full-year earnings per share forecast to $1.32, up from prior guidance of $1.23.

 

Expectations Had Been Cruising For Troubled Waters

 

The disappointing revenue figure seemed to be the catalyst for Norwegian's double-digit stock drop post-earnings. However, investor expectations had also likely baked in scenarios for potential challenges amid troubled economic waters.

 

This showed up in analyst ratings heading into the report. Despite Norwegian restoring profitability, only 32% of analysts rated the stock as a "Buy" with 68% recommending a "Hold." The average 12-month price target of $17.54 implied just 8% upside from current levels around $16 per share.

 

Within the cruise industry, Norwegian has trailed peers like Carnival (CCL) and Royal Caribbean (RCL) in stock performance over the past year. Shares of Norwegian are up 30% compared to 56% for Carnival and an eye-popping 108% gain for Royal Caribbean.

 

Norwegian has a lower market cap around $7 billion compared to $24 billion for Royal Caribbean and $19 billion for Carnival. The relatively smaller size of Norwegian may be making its outlook appear more susceptible to economic pressures impacting consumer demand.

 

A Passing Storm or Larger Economic Swell?

 

The key question is whether this disappointing Q1 report is a one-off anomaly as Norwegian gets its cruising operations back to full strength, or an early sign of larger consumer belt-tightening. Broader economic indicators have been mixed, with resilient employment but slowing inflation and manufacturing activity.

 

Del Rio reiterated that while bookings have moderated in recent weeks, Norwegian's forecast still calls for a "significant" increase in pricing for the full year. If that pricing power persists, it could ease concerns about consumer demand and Norwegian's ability to deliver on its raised profit outlook.

 

The cruise industry has historically been a leading economic indicator, with bookings falling off before economic contractions take full shape. As such, Norwegian's results will be closely watched as a potential bellwether for consumer health.

 

CEO Del Rio acknowledged the need to "watch closely" going forward, but maintained an optimistic tone in his ability to navigate short-term choppiness:

 

"Over our company's 57-year history, we have proven our ability to successfully navigate all types of environments, and we are confident that our...strategy will continue delivering strong financial performance and record setting results."

 

For investors, deciding whether to buy the dip or avoid these murky waters may come down to the level of economic concerns priced into Norwegian's now 14% lower valuation following Q1 earnings.

 
 

NCLH Stock Analysis

 
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16.93
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