RCL's Valuation Attractive

We maintain our Buy rating on Royal Caribbean Cruises (RCL - Analyst Report) following the release of Q2 results, primarily due to its valuation. The current top-line environment appears to be resilient, and we consider RCL to be poised to strongly benefit given an increase in demand. While we expect higher fuel prices to remain challenging, we expect the newly announced cost-saving initiative to provide significant benefits. We also believe that core operating growth will remain attractive.

With the shares currently trading at 10.3xour 2008 earnings estimate and at a 30% discount to its largest rival, we consider the current valuation to be attractive.

On July 22, RCL reported financial results for Q2 08. Total revenue increased 6.9% from the prior year to $1.6 billion and was in line with our expectation. Passenger ticket revenue increased 6.9% from the prior year to $1.1 billion. Net revenue yield and available passenger cruise days (APCD) increased 1.0% and 5.3% from the prior year, respectively. Occupancy decreased 200 basis points from the prior year to 104.0%. Onboard and other revenue increased 7.1% from the prior year to $443.7 million.

However, revenue and earnings growth is largely dependent on the company’s ability to generate favorable pricing, increase occupancy and improve operational efficiencies. The company is susceptible to impact from changes in the cost of crude oil. A cyclical downturn in the U.S.economy or another terrorist-related event similar to 9/11 could adversely affect demand for cruises. Natural disasters, notably hurricanes, could have a negative impact on financial results, given that nearly two-thirds of the company’s capacity is located in the Caribbean.

Read the full analyst report on RCL

Read the full analyst report on RCL