Royal Caribbean Earnings: Bigger is Better?

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The second largest cruise ship company in the world, Royal Caribbean Cruises (NYSE: RCL) operates 39 ships with a total capacity of 92,650 passengers.  The company has done well over the past several years, and is once again paying a dividend after postponing it for a few years.  For those who don’t remember, one of the side stories during the financial crisis was the questioning of the viability of the cruise industry, or anything having to do with discretionary consumer spending, for that matter.  As a result, the stock plunged to a low of $5.40 in 2009, or less than one-fifth of the company’s tangible book value at the time.  Since the market realized that the concerns were (a tad) overblown, Royal Caribbean has rebounded nicely, gaining 583% since the low.

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Royal Caribbean operates ships under its own name, as well as Celebrity Cruises and Pullmantur brand names.  Where Royal Caribbean tries to distinguish itself from the number one cruise company, Carnival (NYSE: CCL), is the uniqueness and diversity among its ships.  For example, in late 2009, just as the recovery was beginning, Royal Caribbean launched the world’s largest cruise ship, the Oasis of the Seas, which has a capacity of 5,400 passengers.  They launched a second ship of this size, the Allure of the Seas, the following year. 

The company’s trend toward larger ships should benefit the company in two main ways.  First, having been a passenger on both a Carnival cruise and on the Allure, I must applaud Royal Caribbean’s efforts to appeal to the diverse demands of their customers.  Having experienced it firsthand, these ships simply have everything.  On a more analytical note, the new ships should benefit from economies of scale, which should boost profit margins and efficiency.  Think of these new ships compared to old ones as comparing a BMW 328i and a Lincoln Navigator.  Both are very nice ways to get around.  The BMW makes 30 miles per gallon as opposed to 20 for the Lincoln, however the Lincoln holds eight people while the BMW holds five.  So, while the Lincoln consumes more gas, it more than makes up for it with the amount of passengers it transports.  Such is the case with these new ships.

In fact, the two Oasis-class vessels have been so successful that Royal Caribbean recently announced that it has ordered a third ship for delivery in mid-2016.  Royal Caribbean’s chairman Richard D. Fain said that “these ships have consistently generated outstanding guest satisfaction ratings and produce superior financial results.”  STX France, the ship’s builder, has also provided Royal Caribbean with an option to order a fourth ship at similar pricing.  Look for the company to comment on the success of these ships during the earnings call, and to offer plans on how they intend to further maximize the guest experience, and thereby, revenues.

Royal Caribbean is attractively valued presently, especially when factoring in the growth projected.  The stock currently trades for 18.9 times 2012’s consensus earnings of $1.95, which are projected to grow to $2.68 and $3.25 in 2013 and 2014, respectively.  This translates to an average earnings growth rate of 32.45% over the next two years, a rate which usually commands a far higher multiple.  In contrast, Carnival trades at 20.5 times 2012’s earnings, and are projected to grow at an average rate of 22.3%, which is excellent, but not quite as good as Royal Caribbean. 

During the earnings call, the most important thing to pay attention to is the company’s outlook going forward.  If the company affirms analysts’ projections, and indeed thinks the cruise industry is on an upswing and that their larger ships will continue to be very profitable, it could be a very positive catalyst going forward.

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