Royal Caribbean (RCL) To Benefit From Solid Booking Trend

Royal Caribbean Cruises Ltd. (NYSE:RCL) is well poised to gain from burgeoning demand for cruise travel, higher passenger ticket and robust booking trends. Further, the company continues to make use of digital tools for marketing, product development and enhancement of consumer experience. However, higher cost woes linger. Let’s delve deeper.

Driving Factors

Since 2017, Royal Caribbean has been consistently witnessing strong demand from its key markets of operations. Last year, demand for the company’s all brands and itineraries increased sharply, and the trend continues in 2018 as well. As a result, the company saw solid bookings in the fourth quarter of 2018. This momentum is expected to continue throughout the year. Royal Caribbean expects robust booking trend in 2019 as well.

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

Moreover, Royal Caribbean has been undertaking profitability improvement initiatives, which are aimed at generating long-term cost savings since 2014. Under its Double-Double program, the company intends to bring the return on invested capital (ROIC) to double-digit percentages, improve revenue yields, control costs and moderate capacity growth.

For 2018, Royal Caribbean projects EPS in the band of $8.75-$8.85, reflecting another year of double-digit growth after 2017. The company expects to benefit from modernization programs, Royal Amplified, Celebrity Revolution, and Silversea's Invictus. These dynamics will help in shaping yields and costs in 2019.

Meanwhile, Royal Caribbean continues to work on enhancing and expanding its technological capabilities, under Project Excalibur. In fact, the company expects to have Excalibur functioning on 50% of its fleet by the end of 2018. It also plans to roll out a smartphone app shortly to increase convenience and better serve guests.

Concerns

In the past three months, shares of Royal Caribbean have lost 5.1% compared with the industry’s 1.9% decline. This underperformance can be primarily attributed to cost-related woes.

Furthermore, the company 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.

Higher-than-anticipated load factors, timing and investment in revenue-generating activities are further adding to the company’s costs. For 2018, Royal Caribbean expects net cruise costs, excluding fuel, to be up about 4.5% year over year. This upside is likely to be driven by planned sales and marketing investments, timing of third-quarter costs and lower-than-expected APCDs due to hurricanes.

Zacks Rank & Key Picks

Royal Caribbean has a Zacks Rank #3 (Hold). Better-ranked stocks worth considering in the same space include Hudson Ltd. (NYSE:HUD) , The Marcus Corporation (NYSE:MCS) and Reading International, Inc. (NASDAQ:RDI) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hudson reported better-than-expected earnings in the trailing four quarters, the average being 63.6%.

Marcus has an impressive long-term earnings growth rate of 15%.

Reading International earnings have surpassed the consensus estimate in the trailing three quarters.

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