4 Reasons To Avoid Norwegian Cruise Lines
With new cases of the coronavirus spiking in the US and worldwide .
With the already historic unemployment levels and job losses in recent months .
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
Both things are necessary to build wealth. But most only think of investing well. Not in preserving capital as well.
Last week I showed you 3 Stocks to Depression Proof Your Portfolio.
This is the growing the wealth part of investments and building capital talked about above.
Today I want to talk about the second part of things that few consider… Staying away from investments that you have a high probability to lose your capital with.
4 Reasons To Avoid Norwegian Cruise Lines Stock
Many industries are getting hurt by the coronavirus pandemic. But few are as hard hit as the hospitality industry.
The hospitality industry includes hotels, restaurants, airports, airlines, travel and travel related businesses, and other adjacent industries. And all of these have gotten hammered since the coronavirus pandemic started in March.
But arguably the hardest hit industry of all in hospitality is cruise ship operators.
I recommend you avoid investing in this entire industry.
But I especially recommend staying away from Norwegian Cruise Lines (NCLH) in the coming months for the following 4 reasons.
1. It’s The Most Indebted Cruise Line
As a percentage of its balance sheet, Norwegian is the most indebted of the major 3 cruise ship lines.
As of the most recent quarter its balance sheet is made up of 73.4% of total liabilities. And its debt to equity ratio is 1.93.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. And, to help insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
Norwegian has the opposite problem – in too much debt on an individual basis. But also when compared to its competitors.
Carnival’s (CCL) balance sheet is 48.3% total liabilities and its debt to equity ratio is 0.45.
And Royal Caribbean’s (RCL) balance sheet is 69.4% total liabilities and it has a debt to equity ratio of 1.26.
Norwegian is the most indebted company of the 3 major cruise line operator stocks. And this makes it enormously risky.
But there’s another reason to stay away from its stock.
2. It’s the Most Unprofitable Cruise Line
In the most recent quarterly data Norwegian was unprofitable on a net income and a free cash flow basis.
These both due to increased costs related to the coronavirus. And an almost complete stoppage in their business since then.
Its Net income profitability margin in the trailing twelve months (TTM) period was negative 29.6%. And its free cash flow to sales (FCF/Sales) margin in this same time was negative 12.5%.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
Generally, you want these numbers to be as high as possible on the positive side because that means the company is generating more profits and cash flow from its operations.
But these were negative in the last quarter to a large degree. Which means it lost a ton of money and is unprofitable over the last 12 months.
As a comparison Carnival’s net income profitability margin in the TTM period is – 4.6%. And its FCF/Sales margin was – 12.5%
And Royal Caribbean’s net income profitability margin in the TTM period is -12.8%. And its FCF/Sales margin was – 9.2%.
These show the industry getting hammered in the last 12 months. But that Norwegian was hit even worse than the others in its industry.
And there are still two more reason to avoid Norwegian’s stock in the coming months.
3. It’s the Third Largest Operator In Its Industry
Most of the time, you want to invest in the biggest and best company with the largest competitive advantages in its industry.
Royal Caribbean doesn’t have these either.
Its only 28% of the size of the largest cruise line operator in the industry Carnival.
And 36% of the size of the number two in the industry Royal Caribbean.
Meaning it’s at a competitive disadvantage to these two far larger competitors in terms of size.
This means Norwegians costs are higher and this makes its margins lower which you saw above.
Over the long term this is a huge deal by itself.
But it’s especially important in times of crisis like we’re dealing with now.
These three things are important. But there’s still one more reason that trumps all others when considering an investment in this industry.
4. Uncertainty Related To The Coronavirus
This all circles back to the beginning and the entire hospitality industry getting hammered by the coronavirus.
Air travel, hotels, and restaurants are still getting hammered. But at least are opening to some degree worldwide.
As of this writing cruise ships still aren’t operating.
And won’t operate until August at the absolute earliest.
But with coronavirus cases spiking nationwide, and in Florida especially where many of these cruise lines operate out of, can cruise lines begin operating in August? Or will the date to reopen for the ships be pushed back farther?
Frankly, I don’t think it matters much…
I don’t see how cruise lines can operate at anything close to full capacity whenever they begin operating.
Both due to fewer people wanting to get on the ships when their operations open. And due to whatever limitations the government puts on them to begin operating again.
Will they open at 75% capacity? 50% capacity? Something else?
As of this writing its not certain. But anything below full capacity will mean even lower revenues, profits, and cash flows for this entire industry.
And with Norwegian already having the highest debt load, smallest competitive position, and lowest margins this will negatively affect them more than its larger competitors.
I recommend you stay far away from this entire industry for the time being for the reasons above. But especially stay away from Norwegian.
Click here to see the stocks we recommend helping Depression Proof Your Portfolio.