Royal Carribbean Appears an Outstanding Long-Term Buy

Royal Caribbean's (RCL) already depressed share price has been heavily hit recently by an earnings miss, an uninformed downgrade and the bashing by short sellers. Yet the fundamentals make it a compelling buy for long term investors.

Some facts:

. The seasonally weak 2008 Q4 EPS was 6 cents below consensus, mostly because of an unexpected one time insurance charge and underestimated fuel cost.

. Under the hypothesis of no economic recovery in 2009, the company forecasts EPS in the range of $1.4 for 2009. That was 15% below consensus, where underlying economic assumptions aren't known. In the past, on average, the company's own annual projections have been more accurate than those of analysts.

. Assuming $1.4 EPS for 2009: after the very weak 2009 Q1, earnings for 2009 Q2-Q4 would be lower by 17%, compared to 2008. Does this justify a 83% drop in the share price?

. According to management, booking trends are more or less back to 2008 levels and the substantial discounts offered for 2009 Q1 are being reduced.

. The earnings estimate implies a 2009 operating cash flow of around $850 M

. Of the 6 ships on order over the next 4 years, the company has long term financing in place for 4 at very favourable rates (close to 4%). It concluded the last financing at the end of 2008, in the midst of the financial crisis. Management indicates that it is very confident to get favourable financing for the remaining 2 ships. But it could pay for the giant Oasis of the Seas, to be launched in Dec 2009, with existing liquidity.

. The stock currently trades at 4.5 times estimated bottom cycle earnings, 25% of is book value and 1.7 times operating cash flow. Its typical PE has been around 14-15.

. The cruise industry remains a growth industry. That is assured by demographics, the well documented value for money of that type of holiday travel and by largely untapped European, Asian und Latin American markets. People often prefer postponing the purchase of a big ticket item before postponing their cruise vacations. With consumer confidence returning, annual earning should recover to their old levels in the not to distant future.

My conclusion: limited short term downside risk, huge medium term upside potential (>700%)

Disclosure: Long RCL

Comments

[Ånden som ...:]

I have stocks in this company, but I don't believe in a 700% growth in the share price on a long term.

While the cruise industry is growing, margins have been steadily declining for the past 10 years. The management's guidance was far higher than the actual results this time, and the guidance for 2009 as a whole, are reflecting the current cruise market.

How do you know it won't get any worse?

Secondly there's the issue of debt. The ships are financed, but how will they pay down debt due this year and in 2010? Without a decent stream of cash flow, this stock will get punished hard, and so will the company.

I do believe that if the company manages it debt properly without retorting to issuing stocks, the share price might be 4-5 times higher than current price.

Feb 02 07:20 PM

[PeakOiler:]

Hmmm, $6 billion in debt, $1.37 billion market cap, only $301 million in cash. Moody's downgraded the company's debt to almost junk level. Dividend has been eliminated. Stock is tanking for all these reasons plus the fact the cruise business is in the toilet.

Buy stocks with low or no debt. RCL doesn't come close.

Feb 02 09:13 PM

[Ånden som ...:]

The company has 1 billion dollar in liquidity, not 300 million.


On Feb 02 09:13 PM PeakOiler wrote:

> Hmmm, $6 billion in debt, $1.37 billion market cap, only $301 million
> in cash. Moody's downgraded the company's debt to almost junk level.
> Dividend has been eliminated. Stock is tanking for all these reasons
> plus the fact the cruise business is in the toilet.
>
> Buy stocks with low or no debt. RCL doesn't come close.

Feb 03 01:10 AM

[Ryanwahlstrom:]

It will be awhile before we see a 700% bump Cruise Pulse survey tracks monthly travel agent booking tends and based on results Cruise Market Watched revised downward its worldwide cruise revenue estimates for 2009. Monthly updates during the wave season.

Feb 03 07:18 AM

[Paul Price:]

If they can roll-over their debt issues RCL will be a huge winner.

If they can't re-fi they're toast. High risk-High reward right now,

Feb 03 08:31 AM

[ChipSeal:]

If margins are declining, that would imply a glut on the market. Chastening new ships won't help!

Feb 03 09:49 AM

[notsosmart:]

how about $100 brl oil? it will come back,sadly.those in charge should begin to think of "buy your own meals" type cruise. i havent gone in years. i feel i have to eat all in sight as i paid for it. buying own food & drink might change my mind.

Feb 03 01:17 PM

[redwino1:]

Have been following and buying RCL for long time. Have faith, she shall return to good numbers within next 14 to 16 months, and give back to those who stood fast.

Feb 10 08:15 AM