Royal Caribbean Is Starting To Look Attractive

Summary

• Royal Caribbean Cruises shares have fallen due to Coronavirus fears.
• Buying when fear is at its maximum height offers the best opportunities.
• While shares may take time to recover, investors will be paid a well covered dividend to wait.
• Ultimately the virus will pass and people will continue to travel.

Source

Shares of Royal Caribbean Cruises (NYSE:RCL) have fallen 37% from their recent highs. The shares have been under immense pressure due to the recent Coronavirus outbreak. Many fear traveling will come to a complete stop and any unnecessary vacations will be put on hold. However, many of these bookings are made in advance, so it is more than likely that the effects will be delayed. However, while there may be a period of softness, moving into the summer months the virus should see a decline in infection rate. This will help promote the feeling of safety and travelers will once again resume their bookings. While I expect an earnings hit, the important factor to remember is that ultimately, the virus will likely pass and investors would have had a great buying opportunity. We take a look below to see if the shares are now worth buying.

The Company and Performance

Royal Caribbean operates in an industry with few players. It has its largest peer Carnival Cruises (CCL) and a smaller peer Norwegian Cruise Lines (NCLH) that are both public and compete in the space. Each has its strengths which make them appeal to their customer base.

Carnival Cruises owns and operates many brands besides its namesake. The Carnival brand itself tends to be more family-oriented and competes directly with Royal Caribbean. Norwegian is typically smaller and a bit higher priced for a more exclusive experience. It tends to appeal to a higher aged demographic.

Royal Caribbean operates under its own name as well as the Celebrity, Azamara Club, Silversea, TUI cruises, and Pullmantur names. The company currently has 61 ships in its fleet with 17 more expected to be put into service in the coming years. In 2019 the company carried 6.5 million passengers up from 6 million in 2018. The expanded capacity of course helps increase revenues, routes, and service. However, demand needs to be present for the return on investment to be worthwhile.

Recently the company reported results that showed growth was still present. At first glance a miss on both the top and bottom line appear to make results look weak.

Source: Seeking Alpha

Revenue grew 8% which was quite healthy. While net income declined year over year, it was due to one time events such as hurricanes and the cancellation of trips to Cuba.

The company reported full year earnings of $9.54 per share.

Source: Earnings Presentation

This represented 8% earnings growth over 2018 earnings of $8.86. Quite impressive considering the cancellations of Cuba cruise lines and other impacts. The company should continue to see growth going forward however it has warned that the Coronavirus could impact earnings by $0.65 in 2020. We may even see these estimates get revised higher. Originally the company had guided for earnings of $10.40-$10.70 for the year. The good new is that if $0.65 is all that earnings are impacted, the company would still see a mid digit earnings growth number for the year.

The company has been steadily growing revenues and earnings for the last several years.

Source: 10K

It has 2020 goals of earnings per share of $20. This would be quite impressive given the short number of years away this is and the current price shares trade at.

Looking at the balance sheet, the company could work to improve its financial condition to be considered a safer investment.

Source: 8K

The company has less than $250 million in cash on hand and $8 billion in long term debt. The current ratio is astonishingly low at 0.15x. The company has to continue to make investments into its new ships and current ships to attract customer leaving it in a capital intensive position. This could become a problem should earnings be impacted for any extended length of time.

Valuation

Looking at its 5 year historical average valuation levels, we can identify whether or not shares offer a discount compared to their own history.

Source: Morningstar

The shares currently offer a discount to their average P/S, P/E, P/CF, P/B, and forward P/E. However, some of these metrics could change as earnings guidance is impacted by the virus issue. If the virus sees containment, than currently shares offer an enticing entry point.

Compared to peers, we can see how valuation stands for Royal Caribbean.

Data by YCharts

Currently, Royal Caribbean trades at a premium to its peers, however, the valuation gap appears to be the lowest it has been in a while on some metrics. With P/S ratio and forward P/E coming down to almost the same levels as the less stellar operators in the space.

Lastly, looking at historical yield, we can identify if shares are offering an above average dividend yield.

Source: Yieldchart

Currently shares offer a 3.79% yield, this yield is so abnormally high that it can't be measured how often is was offered in the company's history. The average yield for shares is 1.72%. This means currently, investors can get a yield that is almost double the average. The dividend appears to be well covered as well with a payout ratio of around 30%.

Source: Seeking Alpha

The company has been raising its dividend for the last 7 years and at an attractive pace. Should this trend continue, investors purchasing shares at current levels could lock in a yield on cost of over 4%.

Conclusion

While the impact from the Coronavirus could be significant and results could become pressured, I believe it will be contained. Significant progress on vaccines are already being made and in time the issue will pass. for investors with a higher risk tolerance looking to take advantage of a negative situation currently, now may be the time. While it may be hard to time the bottom, starting to dip your toe in the water and building a position in this cruise line operator could be a good move. The shares offer below average valuation levels and an above average yield. While it may take time for shares to recover, an enticing dividend is paid to wait. I will look to possibly start a position in the near term.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RCL, CCL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Gametight]

Bankruptcy?

[Willie1985]

Smdh reading this in retrospect

[Patrick Doyle]

@Willie1985
Outcome bias.

[Stefan Redlich]

Down 50% since this article was written and it will likely drop another 25% at least. Heck, it could even become single digits. Complete uninvestible

[Diego Montalbon, raconteur]

Reviewed last recession's sell-side research of one firm on RCL at the time ;

Nov 2008 : RCL @ $9.50 dividend discontinued ; price tgt = 20
Feb 2009; RCL @ $6.49 exp eps 2009 = -0.26 2010 = -0.93 ; price tgt = 1
Apr 2010; RCL @ $34.52 2009 eps = 0.75 2010 est eps = 2.37 ; price tgt = 36 up from 31

Don't know what has changed since then.
Do your own research/ due diligence.

[arok79]

back then they had low capacity. now they have zero capacity. nobody wants to be on those floating quarantines.

[Diego Montalbon, raconteur]

'capacity' ?
or paying customers ?
So your price target is < 1 ?

[arok79]

RCL can very easily hit mid single digits. test the 2009 low.

[vassille]

Me and my wife we both like RCL and we have been avid cruisers for many years with them. We just booked a 9 day Caribbean cruise at the end of this year and I’m not thinking twice about doing so.
I was looking to get into the stock for a while now and I started buying in the 40s and will add all the way to 20 if it goes that low.
RCL has a great reputation, good procedures in place and they don’t cut corners. I know because I’ve cruised with them for years.
This fear of the stock is overblown and while this is a short time pain the long view is that ppl will cruise again. I have a 20 year horizon so I’m not worried how long it takes for the stock to recover.
This stock will be over $100 in a few years and RCL will not go out of business anytime soon.
On a side note, I would like the shorts to keep shorting the stock so I can buy it even cheaper.

[B-Nasb]

Couldn't agree more. People get too caught up in buying/trading stocks...you should look at it as if you're buying a business. In the case of RCL, you are buying a business in a secular industry uptrend at a temporary discount. Five or 10 years from now, I won't remember if I bought some at $60 or at $40, I'll just know I bought a great business at a great price. Bought some more today and will look to continue to add on any further weakness.

[Bill in Shanghai]

Ask 10 people around you "would you buy a cruise ship ticket right now? No matter how low they price these cruises people will not buy a ticket. Revenue is going to drop to close to zero. The question isnt about the industry bouncing back, its can RCL survive while they wait for a vaccine that will be ready in 12-18 months.I persoanlly don't think so. I am short.

[Rolloff1]

I think the more relevant question is whether folks will avoid cruise ships in the future. I live in a very large retirement city, where lots of folks cruise on a regular basis. I'm not aware of a single person who said they'll never go on a cruise again.

RCL will come through the current crisis intact. The dividend may be suspended, the entire industry may need government assistance, but the earning capacity that created $135/sh market value will still be there. My guess is it may take a few years for them to get back to where they were.

Is it worth the risk for a potential 100% return over 3 years?

[Default Smeller]

Are you kidding? You state they may need government assistance but will go through this crisis intact? Nobody questions their earnings capacity in the long run, but the continuous heavy investment requirements and associated debt loads in the industry require continuous cash flows to service the debt. Continuous, NOW, not some day. You invest in stocks but whine for government assistance when the seas literally get rough? I pity you. Why don't you move to North Korea or Cuba or - much more opportune currently - Venezuela when you are so fond of government assistance? Someday a really big bear needs to come along to prove that governments and their machineurs are not all that powerful as the people believe them to be. Better stop relying on them taking you out of your wrong investment decisions now, before you lose your pants completely.

I would rather miss a 100% opportunity, at the end of this correction, bear market, whatever it is there will be FAR better opportunities to earn returns well above 100%.

[EliasMouawad]

Unfortunately, if you take the size into consideration, Italy is in a worse situation compared to China. 80,000 infected persons relative to 1.4 billion total population...7,000 relative to 60 million

[yoloyo]

we are talking about whether RCL will go chapter 11 first, not when to buy it ok.. the balance sheet looks really bad right now given the virus just started spreading in US

[Rolloff1]

My sense is their market is intact. People will still want to cruise when this crisis eventually ends. The dividend will be likely be suspended, but ultimately they'll survive and recover. Six months from now this may be back to 80 on the expectation of future earnings. I own this, but will not sell nor add here.

[Grazi57]

I’m going to sit on my cash for now. You don’t get an opportunity to see a drop like this often. We just need to wait it out.

[Militiades]

I see articles like this and think W.T.F. ??? It's almost like bad comedy because it's so transparent. No one in their right mind buys a cruise stock while cruise ships are sinking unless it's a very quick trade. This industry is an elevator on it's way down. Even us rubes know it. Some of you SA contributors are pretty good but this is the kind of garbage that kills your brand for the future. Maybe you change your name or something but after reading nonsense like this I'd never take ALL STAR TRADER's ideas seriously. Pushing cruise stocks at this point in time is nuts. You are really smart and write well but I'd say "no thanks" to ideas like this one that are so far from reality. Just my two cents.

[Default Smeller]

"Buying when fear is at its maximum height offers the best opportunities." Yup that is correct. Unfortunately fear is NEVER at maximum heigth near an all-time high for a stock. The stock was at 4.80, you issued your call when it was above 100. Maximum fear happens when the "angst" is in the stratosphere, not the stock price. You must have gotten something thoroughly wrong there. I will buy below 10.00 a share. No earlier.

[arok79]

Exactly. These stocks are boom or bust. Sub $10 price will be absolute fear. Best and only time to load up to make outrageous profits.
Buying from $100 and all the way down is definitely not what i would recommend.

[Diesel]

So you'll buy it at a P/E of 1. Good luck with that. They might as well get acquired or go private at that level.

[Grazi57]

I’ll start buying at between 30-50

[B-Nasb]

I'm a long term investor and will continue to add. It may not be up 1,3,6, or 12 months from now...but I'm certain that in 5 years when I look back, I'll be kicking myself for not buying even more.

[arok79]

You will keep adding on the way down. Sure it will bounce but from what levels? Why buy at $65 when i can buy at $35. I would rather buy when a bottom is formed not try to catch a falling knife. Enjoy averaging down as it keeps going.

[B-Nasb]

Of course I would rather buy it at $35 than $65, but you have to use common sense. They would be taken out by a private equity firm way before it ever got to the levels you are thinking. Their ships alone would be worth more than the market cap, and a patient investor like a PE firm can wait out the downturn and then make a killing taking it public even if it only gets back to half the profitability it was at before. It's not like the PE ratio was extreme even at its high of $135...although I was selling at that level along with much of my other stock holdings as PE levels across the board were (and in many cases still are) ridiculous.

[arok79]

that's what people were saying back in 2008-2009. these guys would get bought out. never happened. i just think market is way too complacent. triggers are being hit. leveraged ETFs are accelerating the move down. cruise stocks are in the eye of the storm. they started going down way before coronavirus came into the picture. i never fight the trend and it's telling me more downside. feel free to average cost down. a lot of people do that. i am of the camp that i back the truck up when it's severely depresed and maximum pessimism. i don't see that yet, so i wait.

[arok79]

Use logic. Putting money into RCL at this point is an easy way to lose money. Getting hit hard today again. This heads much lower. It will be a while before a meaningful bottom is made. Dont catch a falling knife. Thats just stupid.

[Grazi57]

Right - Wait this one out... Coronavirus will run its course and go away. THEN will be the time to strike on RCL.

[Barry10]

Keep in mind that even when corona virus fears play out cruise line operators like RCL will likely have to offer big discounts to entice people to return. This means lower margins = lower profits = lower stock price for longer. Anyone buying now is cruising for a bruising regardless of the dividend.

[arok79]

dividend will go bye bye if this gets as bad as i think it will. buying for the yield is reckless.

[investor1020]

I hear you. Potential problems are lack of liquidity to meet debt service. Even if rates go to zero, when is the principal due. For cruise line companies, the Wuhan virus is worse than a recession because in a recession, people still take cruises but not as many and do not spend as much. With the Wuhan virus, very very few are taking cruises and even after the Wuhan virus is contained, it may take longer for the apprehension about traveling on a boat for a week or two with thousands of people from around the world that could have a virus or a mutated virus goes away.

[Militiades]

Cruise stocks are a falling knife until a vaccine comes out. If you are over 60 the numbers are terrible (over 3.5% fatal). 55% of cruise ship passengers are over 50. Talk to the salespeople trying to book cruises. About 50% of their customers currently mention the coronavirus as the reason for not booking. This is a long term issue. RCL will see $60 a share before it sees $100. When a tested vaccine is effective, that's the time to buy. Not before.

[stockfiend]

You analysis does not talk about why the dividend is well covered in the future. In fact, the dividend is NOT well covered at all. Currently the FCF covers dividends just about right (roughly $600M) per year. However, management has said that EPS could be affected in the 15 to 20% range if they have to cancel all cruises through April, which is looking likely. This would mean a loss of $300M in earnings, which inevitably affects their free cash flow. Their cash balance is also not very high to be able to weather the dividend payment storm. They may either have to cut dividends or borrow money to pay out dividends in the short term, should cruise cancellations get worse. On top of that, this is an asset-light business that is heavy on leasing ships, meaning they have to continue paying the lease during this time of stress... Plus, even after the virus passes, usually it takes another 6 months for travelers to feel comfortable booking cruises again if you look at past epidemics. Fear is a big factor for travelers. I would be careful to get in so soon.

[investor1020]

Your points are good ones. Also, if folks previously waited six months before booking cruises again from pas epidemics - what epidemics are we talking about? The Wuhan virus is a pandemic unlike any the MODERN or CURRENT cruise line industry has ever seen. I think there are better industries out there to invest in at the moment compared to the cruise line industry which is a prisoner of the Wuhan virus and could be impacted for more than a couple of quarters.

[rich01]

Floating petri dish. Anyone have a chart for that?

[imeldo marcos]

i bought nclh at 42.50 then bought again at 35.
can't really time the market, anyways i think this whole coronavirus will not be for too long. this is definitely a bioweapon though.

[Shantaram]

did u buy again at 29?

[bergbeta]

did you buy again today at 22.5 ?

[Ronaldo123]

More room to go down. Might cut dividend too. I'm staying away.

[brightlake]

Dividend is likely to be taken away soon. Being debt heavy, they will likely have a cash flow problem.

[HighYieldAnalyst]

I like to see some chart Green prior to taking a position ... we may get some chart Green today!

[greendeath]

At an inflection point. Place your bets!

[Watch List]

wait for end of March earnings it I'll crash to $15 range.

[Sanjay John]

LOL backside target generator working well today!

[shake shake money tree]

Looking back in history, Lowest price for RCL was $9 with peak to trough ratio at 5:1. So your number is slightly more extreme.

[brightlake]

5:1 implies the bottom is around 25-30 - that sounds reasonable.