Royal Caribbean's latest deal looks like a classic top of the cycle move. Is the pattern playing out again for the cruiseline company?
We discuss the changing views on cruises and why the 90s aren't coming back on this week's Behind the Idea.
While it may not be smooth sailing for RCL going forward, there's reason to look to the horizon for the industry as a whole.
I'm reading Daniel Kahneman's Thinking Fast And Slow currently, so I have the idea of updating your prior views and not allowing your intuition to overtake your reason on my mind.
Pretty big boat. Source: Royal Caribbean
Royal Caribbean (RCL) and cruise lines hit on a lot of lazy associations for me. First, I've read a lot of compelling short ideas about the company, most especially this piece by Donald Marchiony and this one by Phaethon Capital. I didn't investigate further, and never took a position in the stock, but I found them to be among the more compelling pieces I've read on Seeking Alpha in the past 6 or so years.
Then, well, cruises seem kind of not cool? From the perspective of a city dweller, seeing hordes of people come into town for a day to consume culture and then depart leaves a mark. I imagine the ships are luxurious and fun, but I'd rather have my own space and time, I think. And as much as that shouldn't affect an investment thought process, there's no doubt I apply a negative halo effect to cruises.
Lastly, there's the piece Spring Mill Research published a week ago, which is what marked our departure point for this week's Behind the Idea podcast. The author, who had previously posted a moderately bullish piece on the company, updated their views in a fine example of Bayesian updating. The trigger? A deal Royal Caribbean made to buy a 2/3 stake in Silversea Cruises, a luxury cruise company. Plenty of associations with top of cycle purchases flooded my mind.
On this week's Behind the Idea, we tackle how to review a company's M&A deal if you're not crazy about it, but also a lot more - the state of consumerism in 2018, the rise of cruise lines, and the true ad power of Instagram and social media. Have a listen:
3:30 minute mark - snapshot of the Spring Mill Research thesis or how RCL isn't learning their lesson
6:30 - What is there to say about this deal?
15:00 - The prospects for the cruise business in general, including Carnival Cruise Line (CCL)
19:20 - The triumph of capitalism or goodbye to the 90s
23:20 - Taking the bearish view to cruise story
28:20 - Is this just a value trap?
32:45 - Taking a closer look at the deal and its timing
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What do you think about cruises and the ROIC vs. WACC equation for RCL? Is that a theme across the industry, specific to RCL, or not really a problem? And do you take cruises? Let us know below. And have a happy 4th of July (or belated Canada Day). If you're on a boat, have fun. Especially if it's not yours!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Neither Mike nor I have any positions in any stocks named.