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Is Norwegian Cruise Line Holdings Ltd (NCLH) Set to Underperform? Analyzing the Factors ...

Long-established in the Travel & Leisure industry, Norwegian Cruise Line Holdings Ltd (NYSE:NCLH) has enjoyed a stellar reputation. It has recently witnessed a daily gain of 0.95%, juxtaposed with a three-month change of -9.56%. However, fresh insights from the GuruFocus Score Rating hint at potential headwinds. Notably, its diminished rankings in financial strength, growth, and valuation suggest that the company might not live up to its historical performance. Join us as we dive deep into these pivotal metrics to unravel the evolving narrative of Norwegian Cruise Line Holdings Ltd.

Is Norwegian Cruise Line Holdings Ltd (NCLH) Set to Underperform? Analyzing the Factors Limiting Growth
Is Norwegian Cruise Line Holdings Ltd (NCLH) Set to Underperform? Analyzing the Factors Limiting Growth

Understanding the GF Score

The GF Score is a stock performance ranking system developed by GuruFocus using five aspects of valuation, which has been found to be closely correlated to the long-term performances of stocks by backtesting from 2006 to 2021. The stocks with a higher GF Score generally generate higher returns than those with a lower GF Score. Therefore, when picking stocks, investors should invest in companies with high GF Scores. The GF Score ranges from 0 to 100, with 100 as the highest rank.

Based on the above method, GuruFocus assigned Norwegian Cruise Line Holdings Ltd the GF Score of 57 out of 100, which signals poor future outperformance potential.

Company Snapshot: Norwegian Cruise Line Holdings Ltd

Norwegian Cruise Line is the world's third-largest cruise company by berths (at more than 60,000), operating 30 ships across three brands (Norwegian, Oceania, and Regent Seven Seas), offering both freestyle and luxury cruising. The company had redeployed its entire fleet as of May 2022. With seven passenger vessels on order among its brands through 2028 (representing 19,000 incremental berths), Norwegian is increasing capacity faster than its peers, expanding its brand globally. Norwegian sails to around 700 global destinations.

Is Norwegian Cruise Line Holdings Ltd (NCLH) Set to Underperform? Analyzing the Factors Limiting Growth
Is Norwegian Cruise Line Holdings Ltd (NCLH) Set to Underperform? Analyzing the Factors Limiting Growth

Financial Strength Breakdown

Norwegian Cruise Line Holdings Ltd's financial strength indicators present some concerning insights about the company's balance sheet health. The company's interest coverage ratio of 0, which positions it worse than 0% of 567 companies in the Travel & Leisure industry. This ratio highlights potential challenges the company might face when handling its interest expenses on outstanding debt. It's worth noting that the esteemed investor Benjamin Graham typically favored companies with an interest coverage ratio of at least five.

The company's Altman Z-Scoreis just -0.21, which is below the distress zone of 1.81. This suggests that the company may face financial distress over the next few years. Additionally, the company's low cash-to-debt ratio at 0.07 indicates a struggle in handling existing debt levels.

The company's debt-to-equity ratio is 903.85, which is worse than 100% of 668 companies in the Travel & Leisure industry. A high debt-to-equity ratio suggests over-reliance on borrowing and vulnerability to market fluctuations. Additionally, the company's debt-to-Ebitda ratio is 21.12, which is above Joel Tillinghast's warning level of 4 and is worse than 92.82% of 585 companies in the Travel & Leisure industry. Tillinghast said in his book Big Money Think's Small: Biases, Blind Spots, and Smarter Investing that a high debt-to-Ebitda ratio can be a red flag unless tangible assets cover the debt.

Growth Prospects

A lack of significant growth is another area where Norwegian Cruise Line Holdings Ltd seems to falter, as evidenced by the company's low Growth rank. The company's revenue has declined by -27.2 per year over the past three years, which underperforms worse than 86.18% of 767 companies in the Travel & Leisure industry. Stagnating revenues may pose concerns in a fast-evolving market.

Lastly, Norwegian Cruise Line Holdings Ltd predictability rank is just one star out of five, adding to investor uncertainty regarding revenue and earnings consistency.

Is Norwegian Cruise Line Holdings Ltd (NCLH) Set to Underperform? Analyzing the Factors Limiting Growth
Is Norwegian Cruise Line Holdings Ltd (NCLH) Set to Underperform? Analyzing the Factors Limiting Growth

Conclusion

Given the company's financial strength, profitability, and growth metrics, the GuruFocus Score Rating highlights the firm's unparalleled position for potential underperformance. While Norwegian Cruise Line Holdings Ltd has a strong brand and a significant market presence, its financial health and growth prospects raise concerns about its ability to outperform in the future. Investors should consider these factors when making investment decisions.

GuruFocus Premium members can find more companies with strong GF Scores using the following screener link: GF Score Screen

This article first appeared on GuruFocus.

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