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Lower Outlook Won’t Sink Norwegian Cruise Line

We believe the operator has significant global capacity growth potential over the next five years.

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We weren’t surprised that narrow-moat  Norwegian Cruise Line (NCLH) lowered its full-year outlook; peer Royal Caribbean (RCL) had done the same the week before. However, Norwegian’s change is wider by significant magnitude as a number of factors are weighing on its full-year earnings potential. Like Royal, upside was limited as a result of a weaker British pound after the Brexit vote, but unlike Royal, Norwegian has experienced weakness in sourcing U.S. consumers for European sailings, something that Royal brushed off as unproblematic. Expectations for Caribbean itineraries out of Miami have been reduced but continue to improve year over year, just at a less robust pace. Occupancy continues to suffer at the expense of holding pricing firm, at 107% in the second quarter versus 109% last year.

Some surprise came from Norwegian rescinding its 2017 goal of $5.00 in earnings per share. We had already contemplated a lower EPS forecast at $4.75; now that we have updated our outlook for 2016 and 2017 (with a 2017 EPS estimate of $3.89), we’ve reduced our fair value estimate to $61 per share from $66. Our new outlook accounts for continued weakness in European itineraries throughout 2017, which we expect will be offset by Alaska, Bermuda, and Balkan routes that remain solid.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.