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What's Good for Royal Caribbean Is Good for Carnival, NCL, and Disney

Motley Fool - Thu Feb 22, 9:15AM CST

You know what's better than delivering a blowout quarter? Raising the bar just three weeks later. Royal Caribbean Cruises(NYSE: RCL) had a strong fourth-quarter report earlier this month. On Wednesday afternoon it announced that things are going even better than its initially rosy outlook.

Royal Caribbean initiated guidance for 2024 on Feb. 1. Its forecast calling for adjusted earnings per share of $9.50 to $9.70 this year was well received. It was well ahead of the $9.19 a share that analysts were targeting at the time. It would also represent 40% to 43% improvement over 2023.

On Wednesday the outlook got even better. The country's second-largest cruise line now expects to earn between $9.90 and $10.10 a share on an adjusted basis, a 46% to 49% increase. Companies will often wait three months between "beat and raise" performances. Royal Caribbean is streamlining the process, and this is great news for fellow cruise ship operators Carnival Corp.(NYSE: CCL), Norwegian Cruise Line(NYSE: NCLH), and to a lesser extent Walt Disney(NYSE: DIS).

Riding the wave

This is a seasonally significant time for the cruising industry. As soon as the winter holiday season ends, cruise lines tend to put out some of their most aggressive promotional offers through the end of March. They call this the "wave" season, as operators look to fill empty cabins for the rest of the year.

Royal Caribbean was already playing up this year's wave season as a success with record bookings three weeks ago. The prognosis has obviously gotten better. If reservations are starting to pick up at Royal Caribbean there's no reason to think that its rival players aren't also riding the same wave.

Carnival is the world's largest cruise line, led by its namesake fleet that caters to the masses with its reasonably priced sailings. Norwegian Cruise Line is the smallest of the three players but with a strong and dedicated fan base. Disney obviously has a lot of other revenue streams in its media empire, but cruise ships matter. Theme parks may be its key contribution to the travel market, but it hasn't opened a new theme park worldwide in eight years. Meanwhile Disney expects to introduce three new ships in the next two years.

If Royal Caribbean is holding up well, it's not going to be sailing alone. All of the cruise line stocks are likely riding high this wave season.

A passenger looking at the ocean from a ship's balcony.

Image source: Getty Images.

Rocking the boat

Royal Caribbean unveiled its Trifecta performance program in late 2022, which outlined three financial goals it was hoping to achieve by 2025. The three Trifecta goals seemed ambitious at the time with the industry recovery far from certain.

  • The cruise line was hoping to top $100 in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) per available passenger cruise day, up from its prior record of $87 in 2019.
  • By 2025 it was hoping to take out its pre-pandemic high of $9.54 in adjusted earnings per share, also set back in 2019.
  • Finally, optimizing capital allocation and enhancing its operating income would be the keys to exceed its 2019 record of 10.5% in return on invested capital.

Earlier this month it announced that it would hit two of the three goals in 2024, a year earlier than it was expecting. The lone holdout was breaking the ceiling of its adjusted earnings high, but now the low end of its new range is well above its 2019 record. Royal Caribbean will be nailing its Trifecta a year early.

Royal Caribbean shares may have more than doubled last year, but this doesn't mean that they are now expensive. The stock is trading for just 11.5 times the midpoint of this year's projected adjusted earnings as of Wednesday's close. Don't look now, but Royal Caribbean could double again in 2024.

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Rick Munarriz has positions in Royal Caribbean Cruises and Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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