Rising Tides Should Finally Lift Royal Caribbean

Jun.20.12 | About: Royal Caribbean (RCL)

The cruise ship industry has been a lousy place for investors since Carnival's (NYSE:CCL) Concordia tragedy. Worries around European growth and high oil prices (until recently) have also provided significant headwinds for the sector. However, I recently added to a position in Royal Caribbean (NYSE:RCL) due to its low valuation and some recent catalysts.

Key Catalysts for Royal Caribbean:

  • The sharp fall in oil prices should start to show up as improving gross margins in upcoming quarters. It is also 18% more fuel efficient than its two biggest competitors.
  • Nomura just came out with a piece calling for Royal Caribbean to hit $43 and improving demand, pricing and lower fuel costs.
  • For the first this year, earnings estimates for FY2013 have ticked up over the last month.
  • The stock looks like it might have bottomed recently and it just went over its 20 day moving average (see chart).

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(Click to enlarge)

4 reasons RCL provides deep value at just $25 a share:

  1. The stock is cheap at just 64% of book value and under 4 times operating cash flow.
  2. RCL is still selling in the bottom third of its five year valuation range based on P/S, P/E, P/CF and P/B.
  3. Credit Suisse has an "outperform" rating and a $34 price target on RCL. S&P has its highest rating "Strong Buy" and a $37 price target on the stock.
  4. The stock yields 1.6% and sells for less than 9.5 times forward earnings, a discount to its five year average (12.1).

Disclosure: I am long RCL.