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How Royal Caribbean Earned a Top-Stock Status in Bull Market

Zacks Equity Research

With the U.S. bull market completing its eighth successive annual run, equities have revived from the sharpest recession since the Great Depression. The crash heralded the start of what has been a remarkable run. In fact, the current bull market is the second longest in history.

The consumer discretionary sector, which tracks the performance of the S&P 500 consumer discretionary stocks, has performed the best in this bull market run. Higher consumer spending levels given rising consumer confidence, positive economic data and an improving job market have bolstered the sector’s performance. In fact, the Zacks categorized Consumer discretionary sector has gained 341.2% in this time frame.

One such company from the sector – Royal Caribbean Cruises Ltd. RCL – has been a value addition to investors’ portfolio and outrun the bull market. Moreover, it continues to reflect strength in several areas. Notably, this global cruise vacation company has gained a massive 1508.3% in the last eight years, while the broader S&P 500 index has returned over 250%.

Key Growth Drivers

Strong Brand Recognition: Serving over five million passengers annually, Royal Caribbean enjoys significant brand recognition, while its strong relationship with travel agents makes it one of the leading cruise companies in the U.S. Given the strength and diversity of its brands and itineraries, the company has been able to successfully capture potential and repeat cruise vacationers, and enjoys immense popularity among cruisers.

Demand Across Geographies: Royal Caribbean has been delivering solid results backed by strong booking trends and capacity growth.

The company’s Asia-Pacific itineraries have been performing extremely well and investment in the fast-growing Chinese cruise markets is also bearing fruit. Meanwhile, overall demand for cruising in North America continues to be solid, while Caribbean and Alaskan itineraries are all doing fine with solid yield improvements. Thus, most of the capacity growth has been recorded in North America.

Given the consistent increase in bookings, the company has been increasing its capacity. The majority of the capacity growth has been recorded in the Asia-Pacific region, with the remaining mostly in the Caribbean. Additionally, strong booking trends witnessed for new ships launched by the company should further drive growth.

The company has also implemented a price integrity policy and stopped the previous practice of offering dramatic last-minute discounts before sailing. Among guests and travel partners, the program instills greater confidence in the integrity of the company’s pricing and encourages prior booking. In fact, this expanded booking window is helping the company make better and more efficient pricing decisions.

Reduced Costs Given Profitability Initiatives: Royal Caribbean has been undertaking profitability improvement initiatives aimed at generating long-term cost savings. The company has now entered the final phase of its Double-Double program launched in 2014. In fact, we note that that the program has mostly done what it set out to do – bookings are at record levels, dividends are at an all-time high, costs have been well managed and guest satisfaction has improved.

Other initiatives that have resulted in reduced costs include carrying out home porting from secondary cities for some of its bigger vessels, improving fuel efficiency of ships to reduce fuel usage and using fuel swaps to mitigate volatility in fuel prices.

Technological Innovation: The company has been deploying technology which includes revamped websites, new vacation packaging capabilities, support for mobile apps, increased bandwidth onboard and streaming WiFi. These initiatives have not only aided in enhancing guest experience but have also driven occupancy.

Bottom Line

Does this mean that the company has been lying on a bed of roses? Well, not really!

Adverse forex translations along with lingering global uncertainties in certain international markets have been keeping growth at check.

However, despite these headwinds, the fact remains that Royal Caribbean has been a solid performer and is well poised to grow in the long run given its strong fundamentals.

Meanwhile, over the past 60 days, current quarter and current year earnings estimates have gone up by 31.4% and 3.5%, respectively, testifying to the unwavering confidence that analysts have in the company. This bullish trend is why the stock boasts a Zacks Rank #2 (Buy). It is also behind our expectation of an outperformance from the company in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Stocks to Consider

Other favorably placed stocks in this sector include Marcus Corporation MCS, Pool Corporation POOL and Intrawest Resorts Holdings, Inc. SNOW. While Marcus and Pool sport a Zacks Rank #1, Intrawest Resorts carries the same Zacks Rank as Royal Caribbean.

The Zacks Consensus Estimate for Marcus’ 2017 earnings climbed 9.5% over the past 60 days. Further, for 2017, EPS is expected to grow 10.3%.

Pool’s earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 19.93%. Meanwhile, for 2017, EPS is expected to improve 17.4%.

The Zacks Consensus Estimate for Intrawest Resorts Holdings’ fiscal 2017 earnings climbed nearly 26% over the past 60 days. Moreover, the trailing four-quarter average earnings surprise is a positive 8.71%.

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