One of the hottest industries for investors last year was cruise line stocks. Royal Caribbean Cruises(NYSE: RCL) led the way, surging 162% in 2023. Rivals Carnival(NYSE: CCL) and Norwegian Cruise Line Holdings(NYSE: NCLH) rose 130% and 64%, respectively.
It's easy to see why the leading operators of recreational sea travel bounced back in a major way last year. Unlike other tourism transport segments that were up and running with minimal downtime, cruise line operators were essentially shut down by government restrictions for more than a year due to the pandemic. Getting back up to speed was a gradual process, and Royal Caribbean would go on to post operating losses for 10 consecutive quarters.
The seas are far more inviting now. All three players have now shattered pre-pandemic trailing revenue records. The future is just as bright, as bookings for upcoming sailings have never been higher -- and at higher price points, to boot. Bears will argue that the stock gains are overshooting the breakthrough, but let the bulls enjoy the victory lap. Following Royal Caribbean's financial update on Thursday morning, it's not out of the question that the fast-growing cruise line stock can double again in 2024.
Respecting the crown
The world's second-largest cruise line posted mixed fourth-quarter results this week. Revenue rose 28% to $3.3 billion, just shy of the 29% year-over-year growth that analysts were targeting. It's a long way down from the 69% top-line increase that Royal Caribbean produced through the first three quarters of 2023, and the sixth consecutive period of sharply decelerating revenue growth.
That's fine. The year-over-year comparisons were bound to get smaller as business returned to normal. The real growth now is happening on the bottom line, where profitability has been explosive. Royal Caribbean's adjusted earnings of $1.25 per share reversed a year-ago deficit. It was also comfortably ahead of the $1.13 per share that Wall Street pros were forecasting. Exceeding expectations has become routine for Royal Caribbean in its recovery.
| Quarter | EPS Estimate | EPS Actual | Surprise |
|---|---|---|---|
| Q4 2022 | ($1.34) | ($1.12) | 16% |
| Q1 2023 | ($0.70) | ($0.23) | 67% |
| Q2 2023 | $1.55 | $1.82 | 17% |
| Q3 2023 | $3.46 | $3.85 | 11% |
| Q4 2023 | $1.25 | $1.13 | 11% |
Data source: Yahoo! Finance.
These aren't just consistent beats. Adjusted earnings have topped estimates by double-digit percentages. With passengers willing to pay up for watery escapes and Royal Caribbean able to keep costs in check, margins are expanding a lot wider than analysts are forecasting. The year ahead is looking solid.
Revenue should keep climbing at a brisk pace. Royal Caribbean noted on Thursday morning that the best five individual weeks of bookings in its history all took place since its previous quarterly report three months ago. The bottom line still remains the best reason for the shares to potentially double again in 2024.
Image source: Getty Images.
Calm seas ahead
Royal Caribbean issued guidance for the new year. It sees adjusted earnings per share clocking in between $9.50 and $9.70 for all of 2024, a 40% to 43% increase over the past year. The analyst consensus is currently perched at $9.19 a share. Net cruise costs excluding fuel are expected to narrow significantly.
The shares are trading at just 13 times the midpoint of this year's projected profit. This seems pretty cheap for a company that is projecting to grow its bottom line at a pace that is more than 3 times that multiple. If you want to frame this in a more jaw-dropping way, Royal Caribbean began last year trading for just 5 times the adjusted earnings it is now modeling for this year.
If you want another mic drop, a year ago Royal Caribbean's guidance for 2023 was calling for just $3.00 to $3.60 in adjusted earnings per share. Of course, the stock more than doubled last year. With its current momentum of "beat and raise" reports, it wouldn't be shocking if Royal Caribbean eventually posts an adjusted profit well north of $10 a share in 2024.
The stock may have delivered huge gains in 2023, but the upside remains as big as its record-breaking Icon of the Seas ship. Bon voyage, investors.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
