We are maintaining our long-term Neutral recommendation for Royal Caribbean Cruises Ltd. (RCL), the second largest company in the cruise vacation industry.
Royal Caribbean’s first quarter 2011 earnings were well ahead of the Zacks Consensus Estimate, on the back of an improvement in bookings and strict cost control. Moreover, with a robust booking momentum, especially in the Caribbean and Alaskan itineraries, we believe that the company is well positioned to drive solid operating leverage in the long run. Slower industry capacity growth in 2012 and beyond will also allow the company to reap benefits considerably.
Additionally, the company’s strategy to hedge fuel prices helped restrain the spike in fuel costs. Royal Caribbean is 56% hedged for the balance of 2011, 55% hedged for 2012 and 30% hedged for 2013. In an attempt to manage fuel consumption, the company is also using more fuel-efficient ships and sailing routes that require lower fuel expenditure.
However, the probable cannibalization of the existing fleet and lesser visibility on the new class of ships that the company is designing make us cautious. Furthermore, the company slashed its full-year EPS guidance range due to geopolitical risks in North Africa and the earthquake in Japan. These disturbances compelled Royal Caribbean to modify some of its sailings, which adversely affected both demand and yield. The upcoming quarter is expected to be affected the most by the ongoing political unrest. In addition, increasing food costs and transportation costs will likely put pressure on its cost structure.
First Quarter 2011 Results
The company posted adjusted earnings of 31 cents per share, handily beating the Zacks Consensus Estimate of 13 cents and exhibiting a strong improvement from the year-earlier quarter’s earnings of 1 cent per share. Strong results came on the back of an improvement in bookings and strict cost control.
Total revenue in the quarter jumped 13.3% year over year to $1,672 million but lagged the Zacks Consensus Estimate of $1,676 million. The prominent year-over-year increase in revenue was driven by a rise in capacity and net yield.
Outlook
For the second quarter, Royal Caribbean expects earnings to range between 40 cents and 45 cents. Net revenue yields are expected to increase 5% (up 1% to 2% at constant currency).
Excluding fuel expenses, net cruise costs are estimated to increase 4–5% (up 2% at constant currency) in the upcoming quarter.
For full-year 2011, management expects earnings per share (EPS) in the range of $3.10 to $3.30 (earlier guidance $3.25 to $3.45). Net revenue yield is expected to be up 5–7% (up 3–5% at constant currency). Net cruise cost, excluding fuel prices, is projected to spike 4–5% (up 2% to 3% at constant currency).
Zacks Consensus Estimate
In the last 30 days, for fiscal 2011, 6 analysts have raised their estimates and 6 have slashed their estimates, thus providing no clear directional movement and are in line with our Neutral recommendation. However, for 2012, 5 out of the 16 analysts have hiked their estimates while 8 have moved in the opposite direction.
Over the last 30 days, earnings estimates have dropped by 3 cents to $3.20 for fiscal 2011 and plunged 11 cents to $3.79 for 2012.
ROYAL CARIBBEAN (RCL): Free Stock Analysis Report
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