Royal Caribbean Stock Rallies 17% In 1 Year: Should You Hold?

Royal Caribbean Cruises Ltd. (NYSE:RCL) is gaining from increasing demand for cruises and solid booking trends. The company’s cost-cutting initiatives also put it on the growth trajectory. However, it is slightly affected by soft demand from its U.K. operations. High costs have also added to the woes.

In the first quarter of 2019, the company saw high demand and increased revenues. Earnings also increased 20.2% year over year. It posted earnings beat for the 17th straight quarter in the first quarter of 2019. Backed by such impressive earnings trend, shares of Royal Caribbean have gained 17.1% in the past year against the industry’s collective decline of 2%.

Let us delve deeper into factors that suggest that investors should hold on to the stock for the time being.

Overall Bookings and Capacity Growth Encourage

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. It stated that bookings from North America and Australia have shown upward trends.

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 believes that its capacity growth for 2019, 2020, 2021, 2022 and 2023 will be 8.6%, 4.1%, 9.0%, 7.7% and 2.8%, respectively. Capacity growth was in double digits for the first quarter of 2019.

Royal Caribbean foresees the major bulk of 2019 capacity to derive from the Caribbean, with Symphony of the Seas sailing year-round from Miami and a full year of sailings on two modernized ships — Mariner of the Seas and Navigator of the Seas. Overall capacity will also increase, owing to the addition of Silversea, contributing just over 2% to growth. Meanwhile, Europe itineraries, accounting for 16% of the total capacity in 2019, will remain similar to that of 2018. The Asia Pacific region is expected to account for 15% of 2019 capacity, with sailings in China, Australia and Southeast Asia.

Profitability Initiatives — Major Positive

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. It expects 2019 EPS to be $9.65-$9.85, reflecting another year of double-digit growth after 2018.

Meanwhile, the company further 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, as under this program, the company aims to improve its guest satisfaction and employee engagement while delivering on its environmental commitments. These operational drivers are expected to aid the company in further improving its double-digit return profile and deliver double-digit earnings per share by the end of 2020.

Concerns

While Royal Caribbean is witnessing robust booking trends from almost all of its current itineraries, it continues to face fickle demand from the U.K. 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.

Moreover, higher-than-anticipated load factors, timing and investment in revenue-generating activities are further adding to the company’s costs. In 2018, net cruise costs, excluding fuel, were up 4.1% in constant currency. In fact, the company expects net cruise costs, excluding fuel, to be up about 10% year over year in 2019. Rise in fuel costs is also a concern.

Zacks Rank & Stocks to Consider

Royal Caribbean currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the industry include Marcus Corporation (NYSE:MCS) , Drive Shack (NYSE:DS) and SeaWorld (NYSE:SEAS) . While Marcus Corporation currently flaunts a Zacks Rank #1 (Strong Buy), Drive Shack and SeaWorld carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Drive Shack and SeaWorld’s earnings for 2019 are expected to increase 34.9% and 169.2%, respectively. Marcus Corporations’ earnings for 2020 are expected to increase 20.7%.

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