Solid Booking To Drive Royal Caribbean, Cost Woes Persist

Royal Caribbean Cruises Ltd. (NYSE:RCL) is poised to benefit from increasing demand for cruises and solid booking trends. The company’s advancement in technology and increase in capacity bodes well. Consequently, shares of Royal Caribbean have gained 22.7% so far this year compared with the Zacks Leisure And Recreation Services industry’s 6.9% rise.

However, increased cost of operations coupled with trimmed earnings guidance, thanks to Hurricane Dorian and travel ban to Cuba, raise concerns.

Let us discuss why investors should hold on to the stock for the time being.

Key Catalysts

Royal Caribbean has been consistently witnessing strong demand from its key markets of operations for some time. In the past two years, demand for the company’s brands and itineraries have increased sharply.

During the third quarter 2019, the company reported higher booking rates compared to the prior-year period’s levels on the back of increased demand from North America, the U.K. and Australia. Also, with the start of early bookings for 2020, management is optimistic regarding the future performance of the company.

On the supply front, the company is steadfast in increasing capacity to match rising demand. Based on current ship orders and predicted capital expenditures, Royal Caribbean projects capacity growth for 2019, 2020, 2021, 2022 and 2023 to be 8.6%, 4.1%, 9.0%, 7.7% and 2.8%, respectively.

Royal Caribbean is also bolstering its commitment to China by dedicating a lineup of its most technologically-advanced ships to the rapidly-growing cruise market in the country. The company aims to attain a lead position in the China market.

Royal Caribbean continues to use digital tools for marketing, product development and enhancement of the consumer experience. These tools include revamped websites, new vacation packaging capabilities, support for mobile apps and increased bandwidth onboard to help guests stay connected at sea. With busier customers preferring more digital devices to save time, introduction of superior Internet bandwidth, online check-in accompanied with radio-frequency identification technology will continue to boost occupancy.

Concerns

The Trump administration's policy change on travel to Cuba is a concern. The new restrictions on Americans going to Cuba will make a negative impact on the cruise industry. It will impact Royal Caribbean’s earnings by 25-35 cents in 2019. Notably, the company anticipates itinerary changes to impact yields during first-half 2020. It also expects to witness the most significant impact during the first quarter, when three of its high-yielding brands that include Silversea and Azamara are scheduled for visit to the island.

After reporting lower-than-expected results in third-quarter 2019, the company trimmed its 2019 guidance. The company expects 2019 earnings in the range of $9.50-$9.55 per share compared with $9.55-$9.65 projected earlier, thanks to the negative impact of nearly 15 cents per share from itinerary disruptions as well as relief efforts for Hurricane Dorian.

Higher costs are a concern for the company. During the third quarter 2019, net cruise costs (NCC), excluding fuel per APCD, rose 11% on a constant-currency (cc) basis. In fact, NCC — excluding fuel — is expected to be up 11% in 2019 at cc compared with prior guidance of 10-10.5%. Also, higher fuel costs are a headwind.

Zacks Rank & Stock to Consider

Royal Caribbean has a Zacks Rank #3 (Hold). Some better-ranked stock in the Consumer Discretionary sector are Vista Outdoor Inc (NYSE:VSTO) , YETI Holdings, Inc (NYSE:YETI) and Studio City International Holdings Limited (NYSE:MSC) . Vista Outdoor and YETI Holdings sport a Zacks Rank #1 (Strong Buy), whereas Studio City carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Vista Outdoors’ current-year earnings are expected to rise 14.3%.

YETI Holdings has three-five year expected earnings per share growth rate of 15.8%.

Studio City surpassed estimates in all of the trailing four quarters, the average being 90%.

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