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Royal Caribbean Gains 12.3% in 3 Months: More Room to Run?

Zacks Equity Research

Royal Caribbean Cruises Ltd. RCL prudently employs profitability initiatives and banks on solid booking trends to drive growth. However, despite having cost-saving measures, the company continues to face increased costs of operations.

The fourth quarter of 2018 marked Royal Caribbean’s 16th straight quarter of earnings beat. Backed by such impressive earnings trend, shares of Royal Caribbean have gained 12.3% in the past three months compared with the industry’s collective growth of 7.5%. Earnings estimates for 2019 have also moved up 0.2% over the past month, reflecting analysts’ optimism surrounding the company’s earnings potential.

Let us look into factors that currently shape Royal Caribbean’s performance.

 

Profitability & Other Initiatives Aid

The company has been undertaking profitability improvement initiatives, which are aimed at generating long-term cost savings. Under its Double-Double program, it intends to bring the return on invested capital (ROIC) to a double-digit percentage, improve revenue yields, control costs and moderate capacity growth. The company expects 2019 EPS to be $9.75-$10, reflecting another year of double-digit growth after 2018.

Meanwhile, Royal Caribbean continues to make use of digital tools for marketing and product development to enhance the consumer experience. These include revamped websites, new vacation packaging capabilities, support for mobile apps and increased onboard bandwidth to help guests remain well-connected while at sea.

Backed by such sales-building efforts, we expect Royal Caribbean’s revenues to grow in 2019. The Zacks Consensus Estimate for revenues in 2019 is pegged at $11.01 billion, reflecting 16% year-over-year growth.

Strong Booking & Capacity Trends

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 has noted that the Wave Season witnessed 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, it expects 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.

Concerns

Royal Caribbean is shifting deployment toward Asia, Australia and certain areas of Europe to curtail capacity in areas with geopolitical risks. The changes related to the international distribution system and a shift in deployment for strategic purposes will likely improve yields. However, it will also increase costs.

Moreover, higher-than-anticipated load factors, timing and investment in revenue-generating activities are adding to the company’s costs. In 2018, net cruise costs, excluding fuel, were up 4.1% in constant currency. In fact, Royal Caribbean expects net cruise costs, excluding fuel, to be up about 8.5-9% year over year in 2019. Rise in fuel costs is also a concern for the company.

Zacks Rank & Stocks to Consider

Royal Caribbean currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the leisure space are Live Nation Entertainment LYV, Planet Fitness PLNT and Drive Shack DS, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Live Nation, Planet Fitness and Drive Shack’s earnings for 2019 are expected to grow 588.9%, 26.2% and 34.9%, respectively.

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