Is Royal Caribbean a Worthwhile Investment?

With shares of Royal Caribbean (NYSE:RCL) trading at around $35.40, is HUM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

logo-royal-caribbean-cruises

C = Catalyst for the Stock’s Movement

Q4 EPS came in at -$1.80. Before impairment charges, EPS was $0.10. Q4 revenue came in at $1.81 billion, which barely missed consensus of $1.82 billion, but was still a 1.7 percent increase year-over-year. Royal Caribbean wrote down $413.9 million due to a big drop in bookings as well as reduced prices in Spain following austerity measures. It’s also widely believed that the sinking of Carnival Corporation’s (NYSE:CCL) Costa Concordia in January 2012 had a negative impact on business for the cruise industry at large. Put simply, people are less likely to board a cruise ship after seeing one sink. Q4 operating expenses were up 0.6 percent to $1.3 billion. The biggest expense of all was fuel, which shouldn’t come as a surprise. Fuel costs were up 19 percent, and Royal Caribbean spent $229.3 million on fuel in Q4, which is a 10.2 percent increase year-over-year.

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FY2012 EPS came in at $0.08, which was a steep drop compared to 2011. For the year, there were 4.8 million passengers, which was similar to 2011. The number of days spent on-ship increased 1 percent.

FY2013 EPS is expected to come in between $2.30 and $2.50. This is below consensus of $2.64, but Royal Caribbean expects record yields in the Caribbean and Alaska. It should also be noted that bookings are up over 20 percent over the past few weeks when compared to last year at this time. Furthermore, on-board spending has been higher than expected.

The real key to this story hasn’t been revealed yet. We will get to it soon. For now, let’s take a look at some important numbers prior to forming an opinion on the stock…

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio for Royal Caribbean is normal, but it’s not as strong as the debt-to-equity ratio for Carnival. Both balance sheets could use improvement.  

Debt-To-Equity

Cash

Long-Term Debt

RCL

0.89

$241.24 Million

$7.78 Billion

CCL

0.37

$465.00 Million

$8.90 Billion

 

T = Technicals on the Stock Chart Are Mixed   

The past few years have been good to Royal Caribbean. However, the momentum has slowed as of late. Royal Caribbean and Carnival have crossed paths many times over the past decade when it comes to stock performance. The end result has been approximately the same, which makes the company offering the higher yield more appealing. In this case, Royal Caribbean yields 1.30 percent whereas Carnival yields 2.60 percent.

1 Month

Year-To-Date

1 Year

3 Year

RCL

0.38%

5.67%

19.22%

45.93%

CCL

4.79%

5.62%

26.71%

28.10%

S&P 500

3.80%

6.24%

15.06%

46.95%

 

At $35.40, Royal Caribbean is trading below its 50-day SMA, and above its 100-day and 200-day SMA.   

50-Day SMA

35.45

100-Day SMA

33.65

200-Day SMA

29.54

 

E = Earnings Had Been Steady          

Earnings had been improving since 2009, but 2012 put a quick halt to that trend. If 2013 guidance proves to be accurate, then earnings will be back on track, yet still short of the 2011 level.

2007

2008

2009

2010

2011

Revenue ($)in billions

6.15

6.53

5.89

6.75

7.54

Diluted EPS ($)

2.82

2.68

0.71

2.37

2.77

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

2.32

1.78

1.83

1.82

2.23

Diluted EPS ($)

1.82

0.16

0.21

-0.02

1.68

 

T = Trends Might Support the Industry

The key to this story pertains to industry trends. As expected, demand in Europe is weak. However, there has been strong demand in North America, and that strength is expected to outweigh weakness in Europe. This point will be further covered in the Conclusion section.

Conclusion

At the present time, it would seem as though North American strength will continue to carry the company. After all, the economy is improving. Then again, is the consumer improving? Not quite. There is a tremendous disconnect between Wall Street and Main Street at the moment, and this situation isn’t likely to play out in favor of a company like Royal Caribbean.

Looking at Royal Caribbean specifically, it’s fairly valued. The stock has also performed well. However, as stated earlier, since Royal Caribbean and Carnival ultimately end up in the same place time and time again, you’re better off going with the higher yield, which is offered by Carnival.

When you combine broader economic concerns, guidance below consensus, and an unappealing yield compared to a competitor, Royal Caribbean is rated a neutral WAIT AND SEE. This is a solid company, but it doesn’t look like a quality investment at this time.

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