It's probably a good time to take another look at Royal Caribbean(NYSE: RCL) after another "beat and raise" performance on Thursday. The country's second-largest cruise line operator exceeded expectations and boosted its full-year outlook, but its shares are still down 27% from where they peaked this summer.
Royal Caribbean is doing better than you probably think. It's also cheaper than you think, now trading for just 12 times its revised profit target for this year. Let's take a look at the fresh financials and the potential red flags, but also the opportunity for Royal Caribbean shareholders.
Come sail away
Revenue in Q3 soared 39% to $4.16 billion, driven by a combination of a 46% surge in ticket revenue and a 25% jump in onboard and other revenue. The year-over-year comparisons will be kind for the industry given that a year ago, cruise lines were still recovering from pandemic and international travel restrictions, but Royal Caribbean still landed comfortably ahead of the $4.05 billion that analysts were expecting. Its record revenue results for the seasonally important summertime period also happen to be 31% higher than the previous record, which was set in the third quarter of 2019. If you thought that cruising would fade in popularity after those ships were first shuttered, and then heavily restricted in their operations for more than a year due to the COVID-19 crisis, you were wrong.
Passengers aren't flinching at the higher pricing relative to pre-pandemic times, either. Occupancy rates are now comparable to where they were before the early 2020 shutdown. Passenger yields are sharply higher. Future bookings are solid. The challenge for Royal Caribbean and its peers has been to navigate the climate of rising costs as they address the things they had to do financially during the lull to stay afloat. Royal Caribbean's share count is 34% higher than it was four years ago -- and its debt clocks in 52% higher. So where does it stand on the bottom line on an earnings-per-share basis?
Royal Caribbean's net income of $1.01 billion is leagues ahead of where it was a year ago, when it was barely profitable. That 10-figure profit is also just ahead of the $883.2 million it delivered during the summer of 2019 -- its previous high-water mark for net income. The math isn't as kind on a per-share basis given today's bloated share count. Royal Caribbean delivered earnings of $3.65 per share in the third quarter, or $3.85 per share on an adjusted basis. Four years earlier, it had a profit of $4.20 a share, or $4.27 per share adjusted.
Don't let those relatively weaker per-share results impede you from realizing that Royal Caribbean is living its best life right now.
Its adjusted profit was 11% better than the $3.48 a share that analysts were expecting. This was its fifth consecutive quarter with a double-digit percentage beat on the bottom line. Management's raised guidance is now calling for adjusted earnings per share of $6.58 to $6.63 this year. Yes, the cruising bellwether turned heads with its adjusted net income of $9.54 a share in 2019, but that year didn't feature the drag of depressed results in the first half as 2023 does.
The analysts' consensus had been that Royal Caribbean would earn $8.41 a share next year, but those predictions were made before Thursday's blowout showing. Those estimates will be revised higher, and one can argue that the premium that investors will be willing to shell out for a piece of Royal Caribbean will follow suit. This stock shouldn't be trading for less than 10 times next year's projected earnings with this bullish momentum.
A lot can still go wrong. Royal Caribbean is already bracing investors for a small hit to its financial results due to the conflict in Israel and Gaza. Some would-be passengers are cancelling their tickets on cruises to the Middle East, and the cruise line itself is rerouting trips that were originally scheduled to dock in Israel and Egypt to other Mediterranean ports of call. Fuel prices are inching higher. There's also geopolitical static that could weigh on demand for open sea getaways, and naturally, the business will take a hit if the global economy stumbles. No one said a stock with a cheap earnings multiple can't be risky. However, given Royal Caribbean's strong market position in an industry that has more than recovered from the pandemic, it could be worth boarding this cruise line stock despite today's rocky currents.
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