2024-01-10 13:00:53 ET
Summary
- Lindblad Expeditions operates a fleet of ships and offers adventurous trips to special destinations.
- The company has a strategic relationship with National Geographic, which was recently expanded and extended to 2040, positioning Lindblad for good growth.
- The company still has pressured margins and a high amount of debt after the pandemic, making the stock quite a risky investment.
- The growth prospects seem to be priced into the stock, as my DCF model estimates a very moderate downside for the stock.
Lindblad Expeditions Holdings (LIND) operates a fleet of ships. The company provides adventurous trips to special destinations with expedition staff on board; for example, the destinations include Patagonia, French Polynesia, and arctic locations. Lindblad has a strategic relationship with National Geographic, providing a meaningful sales channel for the company.
The company is differentiated from other recreational marine operators due to the distinct expedition offering. Due to the differentiation, Lindblad has also garnered a differing customer base - the average customer is 59 years in age with a median net worth of $2 million according to Lindblad's May investor presentation . I believe that the high average net worth is a valuable prospect, as it should provide quite a stable demand throughout economic turbulence. Lindblad books customers directly, through travel agents, through the partnership with National Geographic, as well as through other channels.
The stock has had a flat performance in the past ten years. Prior to the Covid pandemic, the stock was quite stable, but the pandemic and its effects have caused quite a ton of turbulence in the past few years. As Lindblad is expanding its fleet, the company doesn't currently pay out a dividend.
A Growth Story in Progress
Lindblad has had an overall stable growth path. From 2012 to current trailing figures, the company's revenues have compounded at a CAGR of 12.8%. The Covid pandemic largely disrupted Lindblad's bookings, as many trips had to be cancelled - in 2020, revenues decreased by 76%. Since, revenues have recovered. In addition, the company seems to be experiencing a large surge in demand in 2023 as revenues have gone well above the historical trend line.
While 2023 revenues are certainly high, I don't expect the growth to necessarily stop. Lindblad and National Geographic recently extended and expanded the strategic relationship that began in 2004, with the new agreement lasting until 2040. Around 24% of Lindblad's bookings are already gained through National Geographic's sales channels, making the relationship crucial. For Lindblad, the new agreement includes an improved guest experience with National Geographic's storytelling and brand with exclusivity to the National Geographic Expeditions brand for marketing and expedition ships with up to 295 passengers. In addition, as The Walt Disney Company is an affiliate of National Geographic, Lindblad gains access to very valuable sales channels, increasing the expeditions' reach through co-branded experiences. Altogether, the expansion of the agreement opens up avenues for new markets and a growing customer base for Lindblad, positioning the company for a good growth in the future.
Lindblad's margins have stayed quite low even after the demand has recovered. The company's trailing gross margin is only at 43.0%, well below the 2013-2019 average of 51.5% prior to the pandemic. As a result, Lindblad's EBIT margin is only at 1.6% with trailing figures. I don't believe that the gross margin is structurally impaired, though; the gross margin collapsed in 2020, but has been on quite a constant rise since. If Lindblad's gross margin rises into the pre-pandemic average, the company will have an EBIT margin of 10.1%, and I believe that a larger scale of operations achieved with growth could provide some further boost to margins from operating leverage.
A Worrying Amount of Debt
Currently, Lindblad has around $621 million in long-term debt . Compared to the company's market capitalization of $543 million at the time of writing, and considering the current trailing EBIT of $9.1 million, the amount of debt seems excessive. With currently low margins, Lindblad's interest expenses drag the company's earnings into negative territory. The debt repayments are still years away with a part to be paid off in 2027, and some in 2032 and 2033. While Lindblad has time to gather cash flows from the next few years before debts need to be either paid off or refinanced, the company's current cash flow level doesn't provide a very safe backdrop, and I believe the company will remain quite leveraged. Lindblad does have around $168 million in cash, an amount that could potentially be used for deleveraging.
Valuation
Due to Lindblad's large amount of debt, the company's earnings are highly volatile making a P/E multiple for the short term mostly useless. To estimate a rough fair value for the stock and to demonstrate the valuation, I constructed a discounted cash flow model.
In the DCF model, I estimate Lindblad's growth to continue with the recently announced expansion of the National Geographic relationship. For 2024, I only estimate a smaller revenue growth of 5%, as the revenue surge in 2023 could be a temporary boost in demand after the pandemic. Afterwards, as the expansion starts to affect sales, I estimate the growth to accelerate to 12% in 2024, and to fall in the years afterwards into an eventual perpetual growth rate of 2.5%. From 2022 to 2032, the revenue estimates represent a CAGR of 10.5%, a bit below the previous ten years' CAGR of 12.8%.
As the margins should begin to recover, and as Lindblad grows, I estimate the EBIT margin to rise in the coming years. From a 2023 EBIT margin estimate of 3.0%, I estimate the margin to eventually rise by eight percentage points into 11.0%, representing historical gross margins and some operating leverage. Lindblad's cash flow conversion has been very good in many years, but should be weaker in coming years due to the company's capital expenditure needs.
With the mentioned estimates along with a cost of capital of 9.71%, the DCF model estimates Lindblad's fair value at $9.21, around 9% below the stock price at the time of writing. Unless Lindblad's financials rise above my expectations, or the stock price falls, I don't think the stock currently has upside for investors.
The used weighed average cost of capital is derived from a capital asset pricing model:
CAPM (Author's Calculation)
Most of Lindblad's debt is in the form of a senior note with a 6.75% interest rate. I use the interest rate of the senior note as Lindblad's interest rate estimate. I don't believe that the company is likely to pay off a very high amount of its debt in a reasonable timeframe, so I estimate a very high long-term debt-to-equity of 80%.
For the risk-free rate on the cost of equity side, I use the United States' 10-year bond yield of 4.04% . The equity risk premium of 4.60 % is Professor Aswath Damodaran's latest estimate for the United States, made on the 5th of January. While Yahoo Finance estimates Lindblad's beta extremely high at 2.78 , I don't believe that the figure is very representative. The Covid pandemic's massive effect on Lindblad's operations has likely caused extremely high volatility, seen more in Lindblad than the overall index. Instead of the simple Yahoo Finance estimate, I take the average of Damodaran's recreation sector beta estimate of 1.17 and the Yahoo Finance estimate, creating a beta of 1.98. Finally, I add a small liquidity premium of 0.3%, crafting a cost of equity of 13.43% and a WACC of 9.71%.
Takeaway
With the newly renewed agreement with National Geographic, Lindblad is poised to grow through the agreement expansion, continuing the historical growth. Still, currently pressured margins and a very high amount of debt are a burden to the company, and particularly the high debt leverages the risk level for investors. The current valuation doesn't provide upside despite the company's earnings growth potential in my opinion, as demonstrated by the DCF model - for the time being, I have a hold rating for the stock.
For further details see:
Lindblad Expeditions: Poised To Expand With National Geographic