Norwegian Cruise Line Holdings Ltd (NCLH): The Long And Short Of It

The most profitable investment opportunities are often found in stocks affected by negative industry news. Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH), the third-largest cruise company globally, belongs in this category. The relatively young age of its fleet and its ability to leverage strategic relationships with casino partners drive Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH)’ industry leading ROAs. Norwegian Cruise Lines is an attractive investment candidate with the lowest PEG ratio in its peer group (0.76), but the highest ROA (3.9%).

The long and short of it

In the near term, a series of unfortunate accidents involving cruise ships operated by Carnival Corporation (NYSE:CCL) has cast a dark cloud over the cruise industry. It is easy to be distracted by negative news and to ignore numbers which show the bigger picture for the long term. According to the 2013 and 2012 industry reports issued by the Cruise Lines International Association, less than a quarter of people in the U.S. have ever taken a cruise vacation, and only 3.3% of Americans chose cruises as their vacation of choice in 2011. In my opinion, as the cruise industry moves to correct misguided perceptions about cost, entertainment, and even dress code (you do not have dress up in a suit and tie every night), and repositions cruises as a value-for-money travel choice, penetration rates of cruise travel will definitely increase.

Age is a differentiating factor

The age of a cruise company’s fleet impacts returns. Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) has the youngest fleet among its peers, with an average age of 8.1 years, according to its 2012 10-K. This metric excludes the completion of its newest ship Norwegian Breakaway in February this year, which will bring its average fleet down by approximately one year. In contrast, Royal Caribbean Cruises Ltd. (NYSE:RCL) disclosed in a December 2012 investor presentation that 15% of its fleet is more than 20 years old.. The key issue is whether the difference in fleet age translates to a superior return profile for the company with the younger fleet. Based on Yahoo! Finance data, Norwegian Cruise Lines delivered a ROA of 3.9% for the trailing twelve months, trumping an ROA of 2.6% for Royal Caribbean Cruises Ltd. (NYSE:RCL).

The early bird premium

Most people will have the experience of buying perishables at a supermarket sale and get back home to find that many of the items are near their expiry date. A similar situation happens in many industries including airlines and cruises. Cruise companies try to sell tickets as early as possible, to avoid lowering their margins with heavy discounting nearer to the cruise departure date. Besides having a younger fleet, Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) also achieves a higher ROA by securing more upfront bookings.

Cruising and casinos go hand-in-hand, with casino patrons an important source of customers for cruise lines. In addition, casinos typically reward high rollers and regular customers with various gifts, including redeemable cruise vouchers. Strategic relationships with major casino partners Caesars Entertainment and Genting Hong Kong allow Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) to market its cruises to these casino’s customers. Caesars Entertainment is an investee of Norwegian Cruise Lines’ backers Apollo and TPG, while Genting Hong Kong is a major shareholder of Norwegian.