Critical Comparison: Norwegian Cruise Line Holdings Ltd. (NCLH) vs. Chimera Investment Corporation (CIM)

Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) shares are up more than 25.38% this year and recently decreased -0.91% or -$0.49 to settle at $53.15. Chimera Investment Corporation (NYSE:CIM), on the other hand, is up 14.53% year to date as of 12/02/2019. It currently trades at $20.41 and has returned 0.99% during the past week.

Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) and Chimera Investment Corporation (NYSE:CIM) are the two most active stocks in the Resorts & Casinos industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect NCLH to grow earnings at a 6.08% annual rate over the next 5 years. Comparatively, CIM is expected to grow at a -0.50% annual rate. All else equal, NCLH’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 73.57% for Chimera Investment Corporation (CIM). NCLH’s ROI is 9.70% while CIM has a ROI of 1.60%. The interpretation is that NCLH’s business generates a higher return on investment than CIM’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. NCLH’s free cash flow (“FCF”) per share for the trailing twelve months was +1.02. Comparatively, CIM’s free cash flow per share was -0.58. On a percent-of-sales basis, NCLH’s free cash flow was 3.58% while CIM converted -8.53% of its revenues into cash flow. This means that, for a given level of sales, NCLH is able to generate more free cash flow for investors.

Liquidity and Financial Risk

NCLH’s debt-to-equity ratio is 1.00 versus a D/E of 5.74 for CIM. CIM is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NCLH trades at a forward P/E of 9.53, a P/B of 1.81, and a P/S of 1.81, compared to a forward P/E of 9.51, a P/B of 0.96, and a P/S of 2.79 for CIM. NCLH is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. NCLH is currently priced at a -17.48% to its one-year price target of 64.41. Comparatively, CIM is 4.13% relative to its price target of 19.60. This suggests that NCLH is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. NCLH has a beta of 1.67 and CIM’s beta is 0.61. CIM’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. NCLH has a short ratio of 3.48 compared to a short interest of 6.36 for CIM. This implies that the market is currently less bearish on the outlook for NCLH.

Summary

Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) beats Chimera Investment Corporation (NYSE:CIM) on a total of 10 of the 14 factors compared between the two stocks. NCLH is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. NCLH is more undervalued relative to its price target. Finally, NCLH has better sentiment signals based on short interest.