Royal Caribbean Cruises (RCL) stock has been riding a wave of momentum over the past year but has recently pulled back, likely reflecting the general market sell-off. While I’m bullish on the stock, I’m less bullish than I was four months ago when I was tracking the stock — primarily due to the price appreciation — but I believe robust travel demand, improving financials, and a competitive price-to-earnings (P/E) ratio will drive this stock higher, so it might be time to ride the wave to the upside.
The wave of dynamism at Royal Caribbean
Let’s focus on this dynamic. Royal Caribbean Cruises – a global cruise line based in Liberia and headquartered in Miami, Florida – is sailing along with the wind at its back. The company emerged from the pandemic on a wave of demand for travel, vacations and especially experience-based vacations like cruising.
One reflection of this momentum is the achievement of the Trifecta goals – a strategic initiative to improve overall business performance – 18 months ahead of schedule. The Trifecta goals included achieving triple-digit adjusted EBITDA per available passenger cruise day, double-digit return on capital employed and double-digit adjusted earnings per share (EPS). This three-year plan was originally scheduled to be completed in 2025.
This success is due to the increasing demand for cruises, especially to popular destinations such as Europe and Alaska. The company is seeing an increase in bookings driven by travelers looking to explore these parts of the world.
As consumer interest in cruising continues to grow, Royal Caribbean is strategically expanding its fleet to capitalize on this momentum. The company recently launched several new ships, including the Icon of the seasthe largest cruise ship in the world and the company’s best-selling product ever. In addition, Royal Caribbean will Star of the Seas in 2025, further expanding its Icon Class range.
But the expansion doesn’t stop there; Royal Caribbean has ordered a new ship for its Oasis class, which is scheduled to enter service in 2028 and will be the seventh of its kind. These new ships not only increase the company’s capacity, but also offer innovative features and enhanced experiences that cater to travelers’ diverse preferences.
Royal Caribbean once again exceeds expectations
In terms of earnings, Royal Caribbean impressed investors in the second quarter of 2024. The company reported revenue of $4.11 billion, up 16.7% from the same period last year and beating analysts’ expectations by $60 million. This increase was driven by several factors across the company, including onboard expenses, which rose 13.3% year over year to $1.22 billion.
Earnings per share (EPS) for the quarter were $3.21, well above the consensus estimate of $2.77 and a significant improvement from $1.82 a year ago. In response to this positive earnings momentum, management increased its full-year adjusted earnings per share guidance to a range of $11.35 to $11.45, representing a midpoint increase of 68% year over year.
A big plus for investors: The company has also reinstated its quarterly dividend of $0.40 per share, payable on October 11, 2024. This is the first dividend payment since it was suspended in 2020 due to the pandemic.
Price decline in Royal Caribbean shares unjustified
Due to the above-mentioned momentum, Royal Caribbean’s stock price rose to $173.37 per share in July, a 52-week high. The 52-week low is $78.35, highlighting just how far the stock has come over the past year.
However, the stock is currently trading 10 percent below its peak, reflecting a general sell-off in equities triggered by concerns about a hard landing of the US economy and the curbing of carry trade following the Bank of Japan’s interest rate hike.
So was the sell-off justified? Well, the stock is trading at a small short-term premium to some of its peers, namely 13.4x forward earnings. This premium is also easily visible when we look at the EV-to-EBITDA ratio (10.6x).
However, Royal Caribbean is the least leveraged of all the companies, which include Carnival (CCL) and Norwegian Cruise Line Holdings (NCLH). Its debt-to-equity ratio is one-third of the company’s value, compared to 69 percent for Norwegian and 63 percent for Carnival.
In summary, the sell-off does not seem justified, which is also supported by analysts’ price targets.
Are Royal Caribbean shares a buy according to analysts?
On TipRanks, RCL is rated a strong buy based on 11 buy recommendations, two hold recommendations and no sell recommendations from analysts in the last three months. The average price target for Royal Caribbean Cruises stock is $185.50, implying an upside potential of 19.3%.
View more RCL analyst ratings
The conclusion on Royal Caribbean shares
Royal Caribbean Cruises stock is trading at the high end of its 52-week range, but that simply reflects the improving sentiment around this company. Demand for travel, particularly experience-based travel, remains robust, and hitting the trifecta goals 18 months ahead of schedule has further boosted investor confidence. Combined with competitive valuation metrics, I believe this stock could still go higher.
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