Royal Carribean Cruises: Down But Not Out

Royal Carribean Cruises (RCL) reported excellent March quarter earnings Friday of $0.35 v. $0.04, but the shares plunged to a new 5-year low on a reduced full-year outlook.

RCL shares trade right now at just 10.1x trailing earnings of $3.13 - far lower than any of their average P/E levels of the past 10 years. RCL's p/sales and p/bv are also near their lows from 2001 - 2002 when the shares were hit due to the 9/11 terrorist attacks and travel was temporarily halted. Buyers of RCL shares right after September 11, 2001 saw their shares go up over 600% from $7.80 to $55.50 at their 2004 high.

Management guided to 2008 EPS of $2.85 - $3.00 versus a consensus view of $3.20. The main culprit is seen as higher fuel prices. RCL has begun charging passengers a daily fuel surcharge and bookings do not seem to be adversely effected so far.

Here is a data table to illustrate RCL's past performance (source: MSN MoneyCentral):

Royal Caribbean Cruises Ltd: Key Ratios

Royal Caribbean operates 38 ships presently and has 7 more under construction. Capacity figures to increase by 9.3%, 11.4% and 6.4% in 2009, 2010 and 2011 as the new ships come into service.

The 1.9% current yield is higher than any seen on RCL shares since 2003. The payout ratio is a moderate 20% of net profits.

Value Line is assuming a conservative long-term multiple of 14 in their 3- 5 year projections. They see RCL earning around $5.00 /share by then. Applying that 14 P/E on even the low-end estimate of $2.85 for 2008 leads to a 12-month target price of $39.90.

That goal price represents an $8.43 gain from Friday's close or plus 26.8%. If RCL can hit their $3 higher-end earnings goal, then $42 would look achievable. Add in the almost 2% dividend and the total return looks quite nice.

Are those prices realistic? Sure, perhaps they're way too pessimistic. Royal Caribbean shares actually traded between $46.40 and $55.50 at their peaks in each calendar year 2004-2005-2006 and 2007.

Disclosure: Author owns shares and is short puts on RCL.

Comments

[Paul Price]

Should Cuba open their ports to American citizens we could see a big boost to Caribbean travel.

This is not figured in to any estimates for RCL or CCL currently.

[Briggsy]

Backwards way of putting it Paul. Cuba has always welcomed American tourists. It is the U.S. government (and the Cuban exile lobby) which has made it illegal for Americans to travel there. Normalize relations now!

[Little Joe]

We learned at dinner, last night, there are two things to avoid, if you want an enjoyable cruise. First, fly to Puerto Rico, over the choppy seas and overcast skies. This, we did a couple of weeks ago. It made all, or most of, the difference in a good or bad experience. Why didn't someone tell us how important, is this basic cruise idea? I am telling you now, "Don't Choose The Choppy", OK?

Secondly, take the time, like months, to gather the group of six (6) individuals that will, can, and do get along reasonable well in each others company. Have dinner, each week, regularly, as a test of somewhat, because on the cruise, you will be seated and served as a group of six (6), swim as a group, theater as a group, tour the islands as a group, play the slots as a group, meet so many others as a group, and realize, as we did, that there is more picture taking and picture looking later, when you go as a group. O.K.? So, give it some thought. Give it your best, and try to "Cruise As A Group" !

Yes! Our cruise was Royal Caribbean, Adventure of the Seas, and our Group of Six (6), three, old and happily married, couples found things to giggle at, waiters and head waiters to appreciate their fine services. And the list goes on. we are still trading pictures and movies of "Smooth Sailing" from start to finish.

Maybe the six of us will sail again and certainly it will be RCL. There is such a thing as "Back-to-Back&quo... cruises out of Puerto Rico into another group of islands in The Southern Caribbean. Stay right on board after Arruba, Carasel, St Maarten/St Martin, and St Thomas for one leg. Then, off to the southeast for another week. Wow ! L J

P.S. Owning Common Stock in RCL, somehow, can be linked to the cost of your cruise. Look into that aspect. Maybe we will meet !?

[armin]

As per its effectiveness;
RCL is doing a fair job in comparison to it's peers with a Return on Assets, Return on Equity, and Revenues Per Employee of 4.58%, 10.31%, and $138,346.80 respectively. Despite below average performance at managing their resources, the company is above average at managing their owner's equity and at generating revenues from employees compared to other companies in the Recreational Activities industry.
Sentiment: Buy

[MJC]

Little Joe alluded to a shareholder benefit that is rarely discussed on the financial pages. RCL shareholders not only receive nice quarterly dividends, but can receive onboard ship credit when they cruise on RCL carriers. If you become a loyal customer, this can be a very nice benefit that can make up for short term losses in the market. CCL does the same for their shareholders, and I don't forsee any reason for either company to stop doing this.