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Here's Why Investors Should Bet on Royal Caribbean (RCL) Now

Zacks Equity Research

Royal Caribbean Cruises Ltd. RCL is currently one of the best-performing stocks in the cruise space. The industry scenario has also been favorable for the cruise operator in 2018. Per the Cruise Lines International Association, the cruise industry is expected to grow throughout 2019, with 30 million cruisers, up 6% from 28.2 million in 2018.

Additionally, with a Zacks Rank #2 (Buy) and decent share price appreciation, Royal Caribbean seems to be a lucrative investment choice at the moment. Per VGM Score that identifies the most attractive value, growth and momentum characteristics, Royal Caribbean has a Score of B, indicating that it is most likely to outperform peers in the industry.

The company’s shares have outperformed its industry in the past three months. The stock has gained 9.3% against the industry’s decline of 1.6%. The share price appreciation can be attributed to the company’s better-than-expected earnings for 16 consecutive quarters. Earnings estimates for 2019 have also moved up 1.1% over the past two months, reflecting analysts’ optimism surrounding the company’s earnings potential.

Overall Bookings and Capacity Favor Growth

Since 2017, Royal Caribbean has been consistently witnessing strong demand from its key markets of operations. In 2018, demand for the company’s all brands and itineraries increased sharply. This trend is likely to continue in 2019. Management noted that the Wave Season has seen a solid start and overall booking in 2019 is likely to exceed the record high mark in 2018. Accelerating demand is also likely to result in double-digit EPS growth in 2019.

On the supply front, the company is steadfast in increasing capacity to match the rising demand. Based on the current ship orders and predicted capital expenditure, the company believes its capacity growth for 2019, 2020, 2021, 2022 and 2023 to be 8.6%, 4.1%, 9.0%, 7.7% and 2.8%, respectively. Capacity growth of 10.8% is predicted for the first quarter of 2019.

Profitability Initiatives Aid Margins & Earnings

Royal Caribbean has been undertaking profitability improvement initiatives since 2014, which are aimed at generating long-term cost savings. Under the Double-Double program, the company intends to bring the return on invested capital (ROIC) to a double-digit percentage, improve revenue yields, control costs and moderate capacity growth. It expects EPS of $9.75-$10 for 2019, reflecting another year of double-digit growth after 2018. The Zacks Consensus Estimate for earnings in 2019 is pegged at $9.95, reflecting 12.3% growth from 2018.

Meanwhile, the company developed a multi-year period program named 20/20 Vision. The program is expected to serve as a guiding light for the organization over the next three years. Under this program, the company aims to improve guest satisfaction and employee engagement while delivering on environmental commitments. These operational drivers are expected to aid it in further improving its double-digit return profile and deliver double-digit earnings per share by the end of 2020. The Zacks Consensus Estimate for earnings in 2020 is pegged at $11.02, reflecting 10.8% growth from 2019.

Return on Equity & Net Margin

Royal Caribbean delivered a return on equity (ROE) of 17.1% in the trailing 12 months compared with the industry’s increase of 10.3%. This indicates that the company reinvests more efficiently than its peers.

Traditionally, gross margins for hospitality companies are comparatively higher as the majority of expenses come from the cost of operations. However, the sector’s profits are not very high, which is evident from the net profit margin or net margin. The industry’s trailing 12-month net margin is 16.7% while that of Royal Caribbean’s is 19.1%.

Technological & Other Innovation Drives Top Line

Royal Caribbean continues to make use of digital tools for marketing, product development and enhancing the consumer experience. These include revamped websites, new vacation packaging capabilities, support for mobile apps and increased bandwidth onboard to help its guests remain well-connected while at sea. With busier customers preferring more digital devices that help to save time, introduction of superior Internet bandwidth and online check-in, accompanied with radio-frequency identification technology, should continue to increase occupancy.

Meanwhile, Royal Caribbean continues to work on enhancing and expanding technological capabilities under Project Excalibur. The company also plans to roll out a smartphone app shortly to increase convenience and better serve guests. In addition to industry-wide trends, there are several unique factors that are boosting the company’s numbers.

Owing to such efforts, the consensus estimate predicts revenues for 2019 to grow 15.6% year over year.

Other Stocks to Consider

Some other top-ranked stocks in the industry are Cedar Fair FUN, Cinemark CNK and Manchester United MANU, each currently carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Cedar Fair, Cinemark and Manchester United’s earnings for 2019 are expected to increase 14.7%, 10.2% and 14.3%, respectively.

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