Cruising is not what you would usually describe as a wide moat, high return business. The industry is dominated by a few large players who have economies of scale but no significant edge over other providers. If a new company entered the market with a few hundred million dollars to spend on new ships, they could quickly grab a significant market share. Most cruise companies offer relatively similar packages to customers with the main variation of each trip being the cruise location and accommodations for the voyage as well as on-board entertainment facilities. With this being the case, the industry is relatively commoditized and cruise operators really only compete on price.
That is apart from Lindblad Expeditions Holdings Inc. (LIND, Financial).
One of a kind
Lindblad is a one-of-a-kind cruise business. The company offers exclusive National Geographic cruises, which it coordinates with the well-known nature brand. The two entities have signed a multiyear agreement (expires 2025), so Lindblad will not lose this exclusivity anytime soon. This unique selling point allows it to charge significantly more than competitors. No other cruise line operator in the world can use the National Geographic brand to sell cruises to some of the world’s most beautiful natural destinations, including Antarctica and the Galapagos Islands. As a result, the company enjoys industry-leading net yields in excess of $1,000, compared to $200 or less for industry leaders such as Carnival (CCL, Financial), Royal Caribbean (RCL, Financial) and Norwegian (NCLH, Financial). The average trip price is $10,900.
Lindblad’s moat is its National Geographic partnership. Sure, other cruise companies could begin to offer similar cruises to areas of natural beauty, but without the esteemed and well-recognized National Geographic trademark, would they be able to generate similar profits? It is unlikely.
Lindblad's management is headed by Sen-Olof Lindblad, who founded the company in 1979 and has remained at its head ever since. He owns around half of the outstanding shares. Concerning "skin in the game," it is difficult to be more invested than he is.
So far, we have a company with a well established brand operating with industry-leading protected margins and a devoted management. What about growth and margins?
Growth on the horizon
The company has two new ships on order for delivery during the next year (one was supposed to be delivered this month but was damaged during its launch, so the maiden voyage has been postponed). The ships have been self-funded from operating cash flow and cash on the balance sheet.
When in service, the ships are expected to generate annual EBITDA of $8 million by the second year on duty for a cost of $40 million. Over the long term, new builds are estimated to have a return on invested capital in excess of 20%.
When completed, these ships will not only accelerate Lindblad’s growth, but will also be the end of the company’s capital spending program for the time being. Over the past several years, the company has invested all of its cash flow from operations into these vessels, with capital spending totaling $22.8 million during the first quarter. Free cash flow use was $20.1 million for the first quarter of 2017, defined as net cash provided by operating activities, less purchases of property and equipment.
At the end of the quarter, the company had cash and cash equivalents of $103.8 million against long-term debt of $164 million and total assets of $403 million. Management is already putting excess cash to work improving shareholder returns. Last year, a $35 million stock and warrant purchase plan was put in place, a significant figure compared to the company’s current market capitalization of $470 million.
The one downside
The one downside of Lindblad is the company’s valuation. Shares currently trade at a forward price-earnings (P/E) ratio of 38.7 and EV/EBITDA ratio of 24.6, nearly double the market average.
I believe this valuation is justifiable considering the high management ownership, wide moat and projected growth of the business. Moreover, after capital spending is complete, Lindblad has the potential to return $20 million per annum to investors, a substantial amount considering the current market value.
Disclosure:Ă‚ The author owns shares of Lindblad.
