Royal Caribbean Cruises Ltd. (RCL) reported third-quarter 2010 non-recurring earnings of $1.64 per share, well ahead of Zacks Consensus Estimate of $1.56 and the year-earlier quarter’s earnings of $1.07. The quarter’s earnings also inched past management’s guidance range of $1.52 and $1.57. Strong results came on the back of an improvement in close-in bookings and strict cost control.
Total revenue in the quarter increased 16.7% year over year to $2.1 billion, surpassing the Zacks Consensus Estimate of $2.0 billion. The prominent year-over-year increase in revenue was driven by a rise in capacity and net yield.
Inside the Headline Numbers
Net yield upped 5.2% year over year wiping out adverse effects from the ongoing economic uncertainty. The rise in yield was driven by a 19.7% improvement in net ticket revenue and moderate increase in on-board revenue. Net yields at Royal Caribbean were up 7.2% on a constant currency basis. Occupancy rate also rose to 107.3% from 105.4% in prior-year quarter.
Total cruise operating expenses grew 11% year over year to $1.2 billion in the third quarter. Net cruise costs per passenger including fuel dipped 2.3% year over year despite a rise in oil prices in the quarter.
Financials
At quarter-end, the company had total assets worth $18.6 billion versus $18.2 billion at the end of December 31, 2009. Royal Caribbean’s net debt was 49.3% of capital compared with 52.0% as of December 31, 2009.
On a year-to-date basis, Royal Caribbean’s net cash from operating activities was $1.4 billion while capital expenditure was $925.8 million.
Outlook
For the fourth quarter, Royal Caribbean expects earnings per share (EPS) to range between 8 cents cent and 12 cents. Operational disruptions on Pullmantur’s Pacific Dream and Celebrity Century have affected the company’s fourth quarter EPS guidance by approximately 5 cents. Net revenue yields are expected to increase from 4% to 5% (at constant currency, net revenue yields are expected to rise around 5%). Including fuel expenses, net cruise costs are expected to be up 2% (about 3% at constant currency). Fuel costs are expected to be $167 million in the upcoming quarter.
For full-year 2010, management raised its EPS outlook to the range of $2.43 to $2.47 from $2.25 to $2.35. Net revenue yield is expected to be up 4%–5% (same at constant currency). Net cruise cost including fuel is projected to be down 1% (same at constant currency). Fuel expenses for 2010 are currently expected to be $651 million per metric ton.
For fiscal 2011, management remains more upbeat compared with 2010 driven by the expected positive yield trend in all four quarters and anticipates that the company will set a new EPS record.
Our Take
We remain positive on the stock based on a host of factors including strong booking momentum, improvement in net yield, efficient expense control especially fuel conservation efforts, extra-ordinary performance of newest ships, strong demand in coming wave-season and the slowdown in industry capacity. Additionally, management continues to remain focused on cash flow generation as the company has only one ship delivery in 2011. Management stated that the company will delever in the coming years. Royal Caribbean currently retains the Zacks #2 Rank, which translates into a short-term Buy rating.
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