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We remain Neutral on cruise company Royal Caribbean Cruises Ltd. (RCL - Analyst Report). While we have a favorable view of the company’s second quarter results, its improving booking momentum and profitability initiatives; near-term geopolitical concerns in Asia and adverse currency translation keep us on the sidelines at the current level.

Why the Reiteration?

On Jul 25, 2013, Royal Caribbean’s adjusted second-quarter 2013 earnings of 23 cents per share beat the Zacks Consensus Estimate of 10 cents as well as the year-ago figure of 3 cents. Earnings in the quarter were also significantly higher than management’s guidance range of 10–15 cents per share.

Quarterly earnings increased on the back of efficient cost controlling measures and year-over-year improvement in revenues. Revenues grew 3.4% year over year mainly bolstered by higher net yields and increased Onboard and other revenues.

The company’s booking momentum has been improving since the grounding of its close competitor Carnival Corp.’s (CCL - Analyst Report) ship in Italy in Jan 2012, which affected passenger confidence, especially in Europe. Overall bookings for the rest of 2013 across all itineraries remain stable, with higher year-over-year load factors and pricing. Caribbean yields are anticipated to finish year 2013 on a strong note.
The company is in the initial stages of its profitability improvement initiatives, which is aimed at generating long-term cost savings. In fact, its profitability initiatives improved its earnings per share by 5 cents in the second quarter.

Despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. The conflict between Japan and China over disputed islands in East China Sea continues to affect the company’s itineraries as well as demand profile. While the Asian market continues to expand notwithstanding this geopolitical issue, management expects relatively lower revenue yields owing to this disruption. In fact, in the second quarter of 2013, management reduced its ticket revenues guidance by 90 basis points for the second half of 2013.

Royal Caribbean generates just under 50% of its revenues from customers outside the U.S. where a majority pay in local currency. Hence, the current strength of the US dollar remains another concern for the company.
Royal Caribbean currently carries a Zacks Rank #3 (Hold). Other players in the leisure and recreational industry, which look attractive at current levels, include Cedar Fair L. P. (FUN - Snapshot Report) and Rick's Cabaret International Inc. both carrying a Zacks Rank #2 (Buy).

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