Why Norwegian Cruise Line Just Crushed Cruise Stocks

All the major cruise stocks are dropping in Friday trading after Norwegian’s move.

Continuing a plunge in cruise line company stock prices beginning yesterday, Norwegian Cruise Line Holdings (NYSE: NCLH), Carnival Corporation (NYSE: CCL), and Royal Caribbean Cruises (NYSE: RCL) are all sinking today, with their shares trading down by low double-digit percentages, and more than 12% in Norwegian’s case. The trigger for today’s price collapse is a new share offering from Norwegian.

Why has this sale of stocks caused such a bearish reaction on Wall Street? Let’s take a closer look at what’s happening.

Norwegian Cruise Line Stock Just Sold at a Discount

The catalyst driving an investor exodus from the cruise sector is Norwegian Cruise Line’s underwritten public offering of approximately 47.5 million common shares, announced at 6:22 AM Eastern time this morning – though, interestingly, all three major cruise stocks started tanking yesterday. The company priced its offering at $30 per share, an 8.8% discount from the already depressed value at the close of market trading yesterday.

Not only is the discount potentially alarming to investors, suggesting Norwegian is desperate for cash, but the shares also equal 15.1% of the shares which the company had outstanding as of Feb. 16, according to MarketWatch reporting. The pricing itself was likely enough to drive share value down, but the additional dilution of the stock is another red flag driving today’s massive sell-off.

Norwegian was already the cruise line that had most severely diluted its stock during the COVID-19 pandemic and the associated no-sail orders from the CDC, which cut cruise stocks off from revenue for most of 2020.

Back in early December, a UBS analyst, Robin Farley, calculated Royal Caribbean had diluted its shares least, issuing shares equal to 24% of its existing total. Carnival fell in the middle, at 67%, and Norwegian had already issued new shares equal to 104% of its outstanding shares pre-pandemic as of Dec. 8. Today’s announced common share sale will compound the dilution.

The cruise company says it will use the proceeds for two purposes. One of these is the expected “general corporate purposes,” or attempting to keep the enterprise operational while the drought of cruise revenue stretches into the summer, and possibly into the autumn if Carnival’s announcement yesterday of a British sailing halt until Sept. 25 spreads to other countries’ homeports also.

The other use for the cash is repurchasing an entire issue of 2026 senior notes (bonds) issued by its subsidiary NCL Corp. Ltd.

Should Investors Buy the NCLH Dip or Wait and See?

With cruise share prices headed for Davy Jones’ locker, the question naturally arises of whether it’s time for savvy investors to buck the trend and “buy the dip.” Though venturing into speculative territory, the reason for the huge selloff appears to be twofold, giving potential clues about whether the depressed cruise lines are a good deal right now.

Investors are likely selling because of dilution, and because Norwegian’s new common share issue indicates it doesn’t expect sailing and robust revenue flow to resume anytime soon if it’s taking a measure this drastic to stay out of bankruptcy, an assessment that could spell bad news for the whole cruise sector.

It’s obviously a risky bet to enter any sector where all the major players are rapidly bleeding stock market value at the same time. However, dilution may again offer a key. A cruising rebound seems inevitable, given the immense popularity of the pastime and the profitability of the sector.

In this case, the companies with the least dilution will be structurally best positioned to rebound to the highest stock values. Going by this metric, Royal Caribbean looks like the potential best deal, Carnival a middle-of-the-road choice, and Norwegian the least attractive option for investors looking to “buy the dip” during today’s cruise sector crash.

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