We are upgrading our rating on Miami-based Royal Caribbean Cruises Ltd. (RCL) to Outperform form Neutral. Royal Caribbean is the second largest company in the cruise vacation industry.
The rating was upgraded on a host of factors including strong booking momentum, improvement in net yield, efficient expense control, seasonality of demand and a slowdown in industry capacity.
Royal Caribbean reported adjusted second quarter 2010 non-recurring earnings of 28 cents per share, well ahead of Zacks Consensus Estimate of 19 cents and the year-earlier quarter’s loss 22 cents. Strong results came on the back of an improvement in net yields and strict cost control.
Total revenue in the quarter jumped 23.1% year over year to $1.60 billion, almost in line with the Zacks Consensus Estimate of $1.61 billion. The year-over-year increase in consolidated revenue was driven by a rise in ship capacity combined with net yield improvements.
The company is witnessing a solid booking environment. Continued strength in booking patterns during the second quarter helped the company’s revenue yields. Additionally, the company is approaching its fourth quarter, which is a holiday season and expected to garner substantial revenue.
Total capacity in the industry is expected to slow down further and we expect Royal Caribbean to benefit from an environment marked with higher demand and lower supply. Hence, the company’s margin is also likely to recover in step with the economic revival.
Moreover, the company displayed impressive cost-control measures. In the second quarter, results benefited from a 4% year-over-year reduction in net cruise costs per passenger excluding fuel.
Royal Caribbean tried to manage fuel consumption through the use of more efficient ships and sailing routes that require lower fuel expenditures. Most importantly, the company’s hedging program helped to weather the rise in fuel prices. The company is hedged 48% for the rest of 2010, 55% for 2011, 50% for 2012 and 10% for 2013.
Based on the above fundamentals, we expect the stock to fetch above-market returns and thereby upgrade the stock from Neutral to Outperform. Royal Caribbean currently retains the Zacks #1 Rank, which translates into a short-term Strong-Buy rating.
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