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Fire Stalls Royal Caribbean Cruise

Zacks Equity Research

Royal Caribbean Cruises Ltd.’s (RCL) ship ‘Grandeur of the Seas’ met with an accident recently, following the footsteps of another cruise operator, Carnival Corp. (CCL).

Royal Caribbean’s ship Grandeur of the Seas caught fire on May 27, 2013.  There was no casualty in the disaster. Royal Caribbean – the world’s second largest cruise operator – assured a refund to the passengers booked for the May 31 sailing along with the transportation expenses incurred. The ill-fated ship is expected to resume services on Jul 12, 2013.

The cruise industry does maximum business in the summer season. Hence, the timing of the catastrophe took a severe toll on Royal Caribbean. Prior to this incident, Royal Caribbean was anticipating its second quarter 2013 earnings to range between 10 – 15 cents per share. For fiscal 2013, management expected earnings per share in the range of $2.30–$2.50 per share. Royal Caribbean expects the latest fire disaster to cost around 10 cents per share.

In the recent times, the cruise industry has been reeling under pressure mainly due to a series of accidents that took place on the industry’s key player Carnival’s ships.  The grounding of its ship Costa Concordia last January in Italy, the fire at its Triumph cruise ship carrying around 3,000 passengers in early February this year and the equipment problems at Carnival Dream in the Caribbean had industry-wide repercussions.

These tragedies can shatter passenger confidence in the industry especially that of first time cruisers and result in subdued bookings. However, the latest accident was the first setback suffered by Royal Caribbean, of late, and was much smaller in scale than the ones suffered by Carnival.

Royal Caribbean currently retains a Zacks Rank #3 (Hold). Further, despite uncertain economic conditions in Europe, Royal Caribbean is witnessing strong demand in the region in 2013. The U.S. market is also showing healthy signs in terms of bookings. These positive attributes make Royal Caribbean a better-placed company in the industry.

Some companies from the leisure and recreational services industry that are worth a look include The Madison Square Garden Company (MSG) and Regal Entertainment Group (RGC) both carrying Zacks Rank #2 (Buy).

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