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Here's Why Investors Should Retain Royal Caribbean (RCL) Now

Royal Caribbean Cruises Ltd. RCL is likely to benefit from digital initiatives, strong close-in bookings and other ship upgrades. This and the increased focus on Trifecta Program bode well. However, inflationary and supply chain challenges raise concerns.

Factors Driving Growth

Shares of Royal Caribbean have surged 37.2% in the past six months compared with the industry’s 19.2% growth. The company has been benefitting from strong demand for its brands’ vacation experiences, strong close-in bookings (at higher prices) and continued strength of onboard revenue.

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Zacks Investment Research


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During the fourth quarter of 2022, the company reported early consumer engagement, with about 60% purchasing onboard experiences before the sailings. This represents double-digit growth in penetration and much higher revenue (related to pre-cruise purchases) from 2019 levels. The company emphasizes enhancing its e-commerce and pre-cruise capabilities and optimizing its distribution channels to boost guest repeat rates and spending.

Royal Caribbean continues using digital tools for marketing, product development and enhancing the consumer experience. The initiative is vital in enhancing customer preference, engagement, cruise frequency, guest experience and spending. The company has introduced new technological capabilities under its Project Excalibur. It has also rolled out a smartphone app to increase convenience and better serve guests. Streaming WiFi, expanded onboard offerings, customized destination experiences and other ship upgrades are also paying off.

On the supply front, the company is steadfast in increasing its capacity to meet rising demand. Moving into 2023, the company has three ships scheduled for delivery — Icon of the Seas, Celebrity Ascent and Silver Nova. The company anticipates the additions to boost its capacity by approximately 14% from 2019 levels. The company anticipates the ship to be significantly accretive to its key financial metrics.

Meanwhile, the company emphasizes on Trifecta program to drive growth. The program emphasizes financial coordinates, including Adjusted EBITDA per APCD, Adjusted EPS and ROIC, intending to achieve it by 2025-end.

Under this program, the company expects a triple-digit adjusted EBITDA per APCD, exceeding the earlier record adjusted EBITDA per APCD of $87 in 2019. The company also expects to achieve double-digit adjusted earnings per share, exceeding the earlier adjusted earnings per share of $9.54 in 2019. Lastly, the company anticipates achieving a return on invested capital in the teens by the end of 2025. The company intends to achieve the metrics on account of its underlying strategies, robust secular and demographic trends, moderate capacity growth, moderate yield growth and strong cost discipline.

Concerns

The leisure industry is grappling with the coronavirus crisis and Royal Caribbean isn’t immune to the trend. China, which is closed to international travelers, will continue to hurt cruise operators. Also, it stated that the impacts of COVID-19 (on the shipyards), Russia’s ongoing invasion of Ukraine and other macroeconomic events have resulted in some delays in expected ship deliveries.

Royal Caribbean has been bearing the brunt of high expenses for quite some time. During the fourth quarter of 2022, total cruise operating expenses increased 57% year over year to $1,782.4 million. The company’s expenses in the quarter primarily stemmed from the resumption of cruise voyages. This and inflationary increases related to fuel and food costs added to the downside. For 2023, the company expects net cruise costs, (excluding fuel per APCD) to increase 4.8-5.8% from 2019 levels. The company anticipates inflationary and supply chain challenges (mainly related to fuel and food costs) to persist for some time.

Zacks Rank & Key Picks

Royal Caribbean has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Consumer Discretionary sector are Cedar Fair, L.P. FUN, Hilton Grand Vacations Inc. HGV and Crocs, Inc. CROX.

Cedar Fair sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 64.5%, on average. The stock has declined 22.3% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for FUN’s 2024 sales and EPS indicates a rise of 2% and 6.5%, respectively, from the year-ago period’s estimated levels.

Hilton Grand Vacations currently sports a Zacks Rank #1. HGV has a trailing four-quarter earnings surprise of 12.1%, on average. Shares of HGV have declined 6.5% in the past year.  

The Zacks Consensus Estimate for HGV’s 2023 sales and EPS indicates a rise of 7.1% and 10.8%, respectively, from the year-ago period’s levels.

Crocs sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 21.8%, on average. Shares of Crocs have increased 80.9% in the past year.

The Zacks Consensus Estimate for CROX’s 2023 sales and EPS indicates a rise of 12.5% and 2.5%, respectively, from the year-ago period’s levels.

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Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report

Crocs, Inc. (CROX) : Free Stock Analysis Report

Cedar Fair, L.P. (FUN) : Free Stock Analysis Report

Hilton Grand Vacations Inc. (HGV) : Free Stock Analysis Report

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