Norwegian’s ‘freestyle’ IPO cruises down Wall Street

Anchors Aweigh! Norwegian Cruise IPO's explosive debut surprises Wall Street with shock and awe.


WASHINGTON, January 18, 2013 – The long-delayed IPO of Norwegian Cruise Line (NCLH) finally materialized this morning, priced last night at $19 per share, a point above its expected range of $16-18.

The Maven’s been having pretty good luck this month on IPOs and secondaries primarily involved with MLPs, so he figured it might be worth it to take a stab at grabbing some NCLH if they were available. Turns out they were, and hurray for the Maven’s team: the stock popped impressively when it opened not long after 10 a.m. (EST) this morning, rocketing roughly 30% to $25 and change before backing off slightly. That’s a Wall Street version of shock and awe.

At 11 a.m. the stock had stabilized somewhat at $25.07, roughly 32% above the initial offering price. It is, quite frankly, just plain fun to get a score like this in a market that, while bullish this month has been only selectively so, causing more frustration than profit if one is in the wrong sectors.

So why all the excitement about an ocean cruise liner offering in a limited industry that just suffered a tremendous setback last year due to the tragic and seemingly unnecessary sinking of the Carnival-owned Euro cruise ship Costa Concordia? That disaster put the stocks of Carnival (CCL) and competitor Royal Caribbean (RCL) into a funk last summer as investors dumped those stocks for fear of continuing headline and lawsuit risk, particularly on the part of Carnival.


The stocks of both lines, however, have been recovering since then. So the much-smaller Norwegian—taken private late in the first decade of this new century by American private equity firms Apollo and TPG and Hong Kong-domiciled cruise ship operator Genting Hong Kong Ltd—having dropped its IPO attempt earlier this year partially as a result from the fallout from Carnival’s European problems, decided to give it a go. And this time, it worked.

At this point, evaluating this IPO as worth the investment proved something of a challenge. Norwegian is only a tiny fraction of the size of its giant competitors, and it’s deeply in debt, partially due to past sins and mismanagement and partially due to its current, highly ambitious ship-building program which will put three to four new vessels out on the high seas for fun and, hopefully, profit.

In any event, Norwegian’s struggles in the earlier part of this century were a major part in its decision to allow Apollo, TPG and Genting to take them private. Once the buyout was accomplished, the investment team got to work doing what investment teams do. They got rid of Norwegian’s ineffective upper management, spruced up the existing ships which had begun to look the worse for wear, and launched a new shipbuilding program.

Recently, they also pulled three of four liners involved with the company’s unique Hawaiian Islands tour, as they hadn’t been filling enough staterooms. One ship still cruises the islands. But the others have been repurposed elsewhere, like the one in our headline picture above, now crusing Europe as the Norwegian Jade.

Most importantly, however, the new team of managers installed by the investors unveiled two innovative marketing tracks. First, Norwegian designed and began pitching its new paradigm: Freestyle Cruising. Unlike the other cruise lines whose entertainment and on-shore packages tightly control the itineraries of their guests, Norwegian’s new policy is, “anything goes,” more or less.

Once aboard, passengers can largely dine when and where they want, take advantage of whatever services and entertainment they choose, and take planned or unplanned shore excursions as the mood suits.

Freestyle is specifically designed to attract newer generations of cruise fans with casual lifestyles and a healthy disdain for being too tightly regimented while on holiday. And stats show it’s been working well to fill Norwegian’s ships and contribute to each cruise’s profitability which as, collectively, begun to increase.

Norwegian’s second innovation is more subtle. It’s crafted co-operative marketing agreements with major Las Vegas casinos whereby the casinos’ more well-heeled gambling clients can be rewarded with subsidized or all-expenses-paid cruises on Norwegian. Once aboard for a cruise, their fat wallets and free-spending ways tend to enhance the bottom line. Meanwhile, the casinos benefit by having yet another attractive perk they can offer to their high rollers. Win-win.

It’s hard to say where Norwegian’s stock will go from here. But today at least is a happy day for all three lines. Carnival and Royal Caribbean are better companies and more profitable businesses at this point, but they’ve been kept down somewhat by recent events. That said, Norwegian’s surprise pop this morning gave a kick to the stocks of both of their competitors as well, indicated that the other two had been persistently undervalued.

Barring absolute disaster in the Middle East and attendant fuel price increases that may ensue, predictions are that 2013 will be a better than average cruise season. If so, the balance sheets of each should continue to be buoyed up by in increase in black ink per cruise. That’s probably at least part of the reason for today’s not-too-irrational exuberance over the Norwegian IPO.

There’s always another side to the coin, however. Even though today’s NCLH IPO was substantial, the bulk of the company’s stock remains in the hands of its three investors who could choose to dump more stock out onto the market at any given time. So, at least until their ownership begins to decrease, this could weigh on the stock, as any hint of a release will spur fears of dilution on the part of outside investors.

Second, in an environment like now where dividend-paying stocks are where it’s at, Norwegian doesn’t pay one, nor does it plan to pay one, at least for now. The company’s CEO did hint on a CNBC TV interview this morning that he was open, perhaps, to dividends at a later time. But Wall Street types like the Maven always behave like their favorite Saint, Saint Thomas. In this case, if you can’t touch an NCLH dividend, then you don’t believe in it. Always a good policy when it comes to investing.

NCLH’s lack of a dividend isn’t an absolute deal-breaker. Most IPOs that aren’t REITs or MLPs don’t pay a dividend, at least as the outset, as they want to channel any profits they might achieve back into the company for growth at this initial stage. But in the current environment, a stock that lacks a dividend can be notably more volatile on the downside should the market turn nasty, which it very well might if the budget battle starts to raise a big stink in Washington over the next sixty days or so.

We decided to take a chance on Norwegian, however, and we’re looking good, at least this morning. Quite a few IPO investors are likely already bailing, as they’re only in the IPO for the pop. Say, wouldn’t you be tempted to bail on an untried stock if you just make 30% on your money in less than five minutes? Similar to real estate, this kind of rapid IPO buy and sell is known as flipping.

On the other hand, if you’re convinced you’ve just bought a good stock and are willing to be patient, you can continue to hold on to it and endure the first-month volatility of your newly minted IPO for greater gain later on, assuming all works out as you’ve planed. That’s what we’ve done here with recently purchased MLP IPOs and secondaries (new tranches of stock from already-public companies), since we got into them for the fat dividends. Which, of course, we can’t collect if we dump the stock.

At any rate, we’re lovin’ Norwegian Cruise Lines this morning, and we’ll let you know if we’re still in love a month from now, as we continue to hold it today. To find out one of the reasons why, and to learn more about how IPOs work if you’re not familiar with the process, we’ll be posting a revised version of our IPO primer on our companion column for longer stuff, The Prudent Man, sometime during the long weekend.

Caveat: Please don’t take our narrative above as a buy or a sell recommendation. We don’t do that here. We bring to light what we regard as interesting investment ideas, but it’s up to you to do your homework on any given stock. In point of fact, in the case of any IPO that’s had a good pop like this one, it’s usually a good idea not to run after the stock in the aftermarket. Generally, the professional flippers will be happy to sell it to you on their way out the door. So even if you like the idea of owning this stock, you might want to sit things out for awhile until it settles down. Again, though, your choice.

As for the market itself: it’s up, down, and sideways today, typical for a Friday during options expiration weeks like this one, and also typical for a long holiday weekend—this one due to the simultaneous occurrence of Inauguration Day and MLK Day, both of which coincide on Monday. The confluence of these two holidays is oddly significant this year, given the correlation of the slain Civil Rights leader’s celebratory holiday with the second term inauguration of a president whose tenure might very well not have been possible without Dr. King’s ultimate sacrifice.

In any event, the mundane, practical result of this confluence is that the President will be “officially” inaugurated in private for his second term on the legally official date of Sunday, January 20 date. Then, he’ll be inaugurated publicly up on Capitol Hill on Monday the 21st along with all the attendant speeches, parading, and evening Inaugural Balls that have long been a part of Washington tradition.

Meanwhile, as is also traditional, Wall Street and Federally chartered banks will be closed for this unusual dual holiday. And so will we. We’ll be back on Tuesday, though, when the wild rumpus will begin anew. Good luck to us all, and have a great holiday weekend!

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any ar500ticle under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

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