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Royal Caribbean Stock Up 13% in 3 Months: More Room to Run?

Zacks Equity Research
Royal Caribbean Stock Up 13% in 3 Months: More Room to Run?

Higher passenger ticket, increasing demand for cruises, solid booking trends and technological investment bode well for Royal Caribbean Cruises Ltd. RCL. In the past three months, the stock has gained 12.8% compared with the industry’s 3.4% growth. However, higher costs might hurt the company’s profitability in the near term. Let’s delve deeper.

Hidden Catalysts

Royal Caribbean’s cruises brands and itineraries have been facing rising demand since 2017. As a result, the company registered solid bookings in the third quarter of 2018 and the trend is expected to continue throughout the year. Meanwhile, European itineraries accounting for 17% of the total capacity have been witnessing a consistent uptick in demand. Also, trends for North America have remained solid, resulting in higher ticket prices and increasing onboard spend. Particularly, Asia-Pacific itineraries had a strong second quarter, with robust yield growth in Australia, China and Southeast Asia. We believe, these itineraries are in a good book position for 2018.

On the supply front, the company is steadfast in increasing its capacity to match rising demand and expects to maintain a demand-supply balance throughout 2018.

Meanwhile, the Zacks Rank #3 (Hold) company’s multi-year period program named 20/20 Vision is likely to continue driving growth. The program is expected to serve as a guiding light for the organization over the next three years. Under this program, Royal Caribbean aims to improve its guest satisfaction and employee engagement besides delivering its environmental commitments. These operational drivers are expected to aid in further improving its double-digit return profile and deliver double-digit earnings per share by the end of 2020.

Royal Caribbean continues to make use of digital tools for marketing, product development and enhancement of consumer experience as well. 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, online check-in accompanied with radio-frequency identification technology should continue increasing occupancy.

Concerns

Royal Caribbean, which share space with Carnival Corporation CCL, is shifting its deployment toward Asia, Australia and certain areas of Europe to curtail capacity in areas with geopolitical risks. The changes related to 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. For 2018, the company expects net cruise costs, excluding fuel, to be up about 2.5% year over year.

As Royal Caribbean significantly outperformed the industry in the last five years, its valuation looks a bit stretched compared with its own range as well as the industry average. Looking at the company’s EV/EBITDA ratio (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization), which is the best multiple for valuing cruise companies as they are highly capital-intensive, investors might not want to pay any further premium. The company currently has a trailing 12-month EV/EBITDA ratio of 12.58. The stock is relatively overvalued right now compared with its peers as the industry average EV/EBTDA multiple currently stands at 7.89x.

Key Picks

Two better-ranked stocks in the leisure space are Reading International, Inc. RDI and Vail Resorts MTN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Reading International reported better-than-expected earnings in the trailing two quarters.

Vail Resorts’ earnings in the current year is estimated to grow at 72.6%.

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Reading International Inc (RDI) : Free Stock Analysis Report
 
Carnival Corporation (CCL) : Free Stock Analysis Report
 
Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
 
Vail Resorts, Inc. (MTN) : Free Stock Analysis Report
 
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