Royal Caribbean Tops, Outlook Up

Zacks

Royal Caribbean Cruises Ltd. (RCL) reported third-quarter 2012 adjusted earnings of $1.68 per share, which breezed past the Zacks Consensus Estimate of $1.45. The results came on the back of efficient cost control measures. However, earnings per share lagged the year-earlier level of $1.82 per share.

Quarter Highlights

Total revenue in the quarter decreased 4.1% year over year to $2,226.4 million which also beat the Zacks Consensus Estimate of $2,214.0 million. Net yield nudged up 0.1% year over year on a constant currency basis (down 2.4% on a reported basis). The meager rise in yield was driven by a 0.6% improvement in on-board revenue, partially offset by a 5.7% decline in net ticket revenue. The occupancy rate nudged down to 107.3% from 107.9% in the prior-year quarter.

Total cruise operating expenses also came down 4.1% year over year to $1,348.3 million. Net cruise costs excluding fuel increased 2.0% on constant-currency basis (decreased 0.2% on reported basis).

Liquidity

At quarter end, the company had cash and cash equivalents worth $241.2 million versus $262.2 million at the end of fourth quarter 2011.  At the end of the quarter, total long-term debt was $6.6 billion versus $7.9 billion at the end of fourth quarter 2011.

Guidance

For the fourth quarter, Royal Caribbean expects the bottom line to range between a loss of 2 cents and a gain of 8 cents. Net revenue yield is expected to increase 1% at constant currency. Excluding fuel expenses, net cruise costs are estimated to increase 1% at constant currency in the upcoming quarter. Fuel costs are expected to be $229 million.

For full-year 2012, management raised its earnings per share guidance to the range of $1.85—$1.95 from the range of $1.70—$1.80. Anticipation of strong revenue generation, cost reduction and currency benefits net of oil price increases led to the hike in guidance.

Net revenue yield for 2012 is expected to increase 3% at constant currency (previous range was 2–3%). Net cruise cost excluding fuel is projected to increase 4% at constant currency (same as earlier prediction). Fuel expenses are expected to be $910 million per metric ton.

Although visibility is narrow, the company commented that the booked load factors and average per diems for 2013 at the current level are marginally higher year over year.
 

Our Take

We believe that Royal Caribbean is recovering at a steady pace from its close competitor Carnival Corp.’s (CCL) ship grounding in January and consequent dip in passengers’ confidence to sail. Further, the economic turmoil in Europe continues to nag the company.

However, the upheaval seems to have dispersed as reflected by the company’s increased earnings guidance. The company also experienced a slight increase in on-board revenue in the quarter and its cost containment efforts are also paying off.

Given the company’s relatively stabilized booking patterns, cost containment efforts, fuel conservation initiatives and the slowdown in industry capacity at the current level, we remain optimistic on the stock of the world’s second-largest cruise operator.

Royal Caribbean currently carries a Zacks #2 Rank, which translates into a short-term Buy rating. We maintain our long-term Neutral recommendation on the stock.
 

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