Halftime Report

The first half surprised on the upside with tech leading the way. Will the second half bring more of the same?

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Published Sep 13, 2023 7:32 PM by Jack O'Connell

(Article originally published in July/Aug 2023 edition.)

[By Jack O’Connell]

After a grueling 2022, which saw stocks tumble an average of 20 percent, the first half of 2023 provided a welcome relief. Led by the tech-heavy Nasdaq, which rose an impressive 32 percent (versus a loss of 33 percent last year), stocks were up across the board – despite rising interest rates, the war in Ukraine, tangled supply chains and a looming recession.

The S&P 500 and Dow Jones Industrials trailed the Nasdaq but nonetheless recorded respectable gains of 16 and four percent, respectively. All three have added to their gains since. As of this writing, the Dow is up seven percent on the year, the S&P 500 19 percent and the Nasdaq 35 percent.

I’ll take it.

Whatever happened to the “looming recession”? Like “Waiting for Godot,” it may never come, and the economy is growing, not contracting – expanding at a 2.4 percent rate in the second quarter. According to Bank of America’s Chairman & CEO, Brian Moynihan, “We continue to see a healthy U.S. economy that is growing at a slower pace, with a resilient job market.”

Bank of America is the nation’s second largest bank, and it delivered one of the strongest first halves in the company’s history. It also has a steady finger on the pulse of the American economy and the health of the consumer: “Asset quality and the overall health of the American consumer remained strong,” noted CFO Alastair Borthwick in commenting on the bank’s results. “Total loss rates remained below pre-pandemic levels.”

If the big banks are doing well – and J.P. Morgan Chase, Citi and Wells Fargo reported results similar to B of A’s – then the economy is doing well, and that’s good news for investors. FOMO – “fear of missing out” on the current rally – is also driving investors back into stocks, reversing the bond-heavy strategy favored earlier in the year.

So far this year, investors are winning.

Cruise Stocks Rising

Remarkably, no sector did better in the first half than the Big Three cruise stocks – Carnival (CCL), Royal Caribbean (RCL) and Norwegian (NCLH) – which are benefiting from pent-up demand and the aforementioned healthy consumer. Carnival and Royal Caribbean both more than doubled while Norwegian trailed with a measly 90 percent gain.

The second quarter marked a turning point, according to Carnival, which was the first to report results. Carnival’s nine brands include Princess, Holland America and Cunard and account for nearly half of all cruise passengers, so it’s a bellwether for the industry.

“We reached a meaningful inflection point for revenue this quarter,” noted CEO Josh Weinstein,  “with net yields surpassing 2019’s strong levels, and we achieved positive operating income, cash from operations and adjusted free cash flow. Based on continued strength in pricing, we delivered outperformance in the second quarter and raised our expectation for revenue in the second half. With bookings and customer deposits hitting all-time highs, we are clearly gaining momentum on an upward trajectory.”

On the all-important topic of debt reduction, the company had this to say: “We reached a meaningful turning point this quarter as we began deleveraging our balance sheet and are already $1.4 billion dollars off our peak debt. We believe with over $7 billion of liquidity, our improving EBITDA and our return to profitability in the second half of 2023, we are very well positioned to pay down debt maturities for the foreseeable future. We remain disciplined in making capital allocation decisions, and our lowest orderbook in decades provides a pathway for further deleveraging.”

That’s good news as the massive debt loads of these companies, incurred during the pandemic’s “No Sail” periods, remain a concern. But at least they’re now cash flow-positive.

CCL currently trades at around 18. It started the year at 8.

Number two Royal Caribbean reported next and the news seemed to get even better. Results “were significantly better than the company's guidance due to stronger pricing on closer-in demand and further strength in onboard revenue,” its earnings release stated. “As a result of the accelerating demand environment for its vacation experiences, the company is increasing its 2023 Adjusted Earnings per Share guidance by 33%.”

Thirty-three percent is a big number, but that’s what the Street wants to know – what comes next? If CEOs see a bright future ahead, that’s good for investors and their stocks usually go up.

“Our brands continue to fire on all cylinders, resulting in record yields and second quarter earnings significantly exceeding our expectations,” gushed Jason Liberty, Royal’s President & CEO. “Demand for cruising and our brands is exceptionally strong and we have seen another step change in booking volumes and pricing, leading us to now expect double-digit net yield growth for the full year.”

Wow, “step change,” “turning point,” “inflection point.” I’m beginning to get the picture here, and it’s a good one.

RCL currently trades at about 105, up from 48 in January.

Number three Norwegian, whose brands include Oceania and Regent Seven Seas, confirmed the general industry optimism when it reported in early August.

“We are pleased to report strong second quarter results, in which we met or exceeded guidance on all key metrics,” stated Harry Sommer, President & CEO. “The continued strength in the demand environment is evident not only in this quarter’s results, in which we generated a meaningful increase in pricing on 19% capacity growth compared to 2019, but also in our forward booked position which is within our optimal range and at higher pricing.”

Higher pricing, strong demand, all good.

“As we look to the near future,” he continued, turning to the all-important topic of forward guidance, “we are focused on sustaining this momentum by capitalizing on the robust demand environment, strategically enhancing our guest experience, rightsizing our cost base through our ongoing margin enhancement initiative, building excitement for the upcoming launches of Norwegian Viva and Regent’s Seven Seas Grandeur and ultimately charting a path to reduce leverage and de-risk our balance sheet.”

Okay, keep it going! We’re with you. Norwegian trades at around 18, same as Carnival. It started the year at 11.

Offshore Optimism

The other big bright spot for maritime is the offshore energy sector – workboat companies, oilfield service companies, drillers, oil and gas carriers. The fossil fuel business is on a roll as offshore wind stumbles and global demand for oil and gas rises.

Take Tidewater (TDW), the world’s largest offshore workboat company. Its stock has doubled since the beginning of the year, and the company sees increased earnings ahead as the offshore E&P market continues to strengthen. Further bolstering its global reach, Tidewater recently announced the completion of the $580 million acquisition of 37 high-spec platform supply vessels from Norway’s Solstad Offshore.

 Quintin Kneen, Tidewater’s President & CEO, noted: “The acquired vessels make up the highest specification PSV fleet of its size in the world and will be an excellent complement to our existing fleet of PSVs. The combination also results in the largest hybrid OSV fleet in the world with 14 battery hybrid and 2 LNG capable vessels. This acquisition marks the completion of another important milestone in the strengthening of Tidewater’s leadership position, and we remain focused on bringing together the world’s best OSV fleets to create the safest, most sustainable, most reliable, most profitable high-specification OSV fleet in the world.”

Raymond James analyst Jim Rollyson was impressed and recently initiated coverage with a Strong Buy rating and a target price of 85. The stock currently trades around 65.

SLB (formerly Schlumberger), a global leader in oilfield services, sees a bright future ahead as well and the beginning of a long-term upcycle for offshore oil and gas. “We are in the midst of a unique oil and gas cycle,” stated CEO Olivier Le Peuch at a recent J.P. Morgan conference, “driven by long-cycle developments, production capacity expansions, the return of exploration and appraisal in brownfields and new frontiers, and the criticality of gas as a long-term fuel for energy security.”

He added that “offshore, from shallow to deepwater, is experiencing a broad resurgence,” with more than 400 active offshore rigs worldwide and double-digit growth expected through 2024. “And the outlook beyond 2024 is strong,” he continued, with more than $500 billion in final investment decisions (FIDs) expected in the 2022-2025 period, up 90 percent from the pre-pandemic 2016-2019 period.

Given recent technological advances, approximately 85 percent of these projects are viable at oil prices below $50/barrel – well below today’s price of around $80/barrel – thereby “decoupling them from short-term price volatility,” Le Peuch noted.

 Drillers like Transocean (RIG) and Seadrill (SDR) also stand to benefit, as well as companies like Cheniere (LNG), so there’s lots of good choices here.

Halftime Adjustments

In sports, halftime adjustments can make a big difference between winning and losing. Investing is no different. Given the outlook for the cruise industry and companies that benefit from the resurgence in offshore energy, there’s little incentive at this point for midterm corrections.

Steady as she goes is my mantra. So far we’re winning. 

Jack O'Connell is the magazine's senior editor. 

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.