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We expect Florida-based cruise company, Royal Caribbean Cruises Ltd. (RCL - Analyst Report) to beat expectations when it reports second-quarter 2014 results on Jul 24, before the opening bell.

Why a Likely Positive Surprise?

Our proven model shows that Royal Caribbean is likely to beat earnings because it has the right combination of two key components.

Positive Zacks ESP:  Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +3.77%. This is very meaningful and a leading indicator of a likely positive earnings surprise for the company.

Zacks Rank: Royal Caribbean has a Zacks Rank #2 (Buy). Note that stocks with Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.  

The combination of Royal Caribbean’s Zacks Rank #2 and +3.77% ESP makes us confident of an earnings beat.

What is Driving the Better-Than-Expected Earnings?

Despite pressures in the Caribbean business, the company has a positive outlook for the coming quarters on solid demand for European and Chinese sailings. We believe demand in the European and Chinese market along with robust bookings will drive the company’s top line in the upcoming quarters. Also, efforts to tackle the volatility in fuel prices and productivity initiatives like divestment of Pullmantur non-core businesses will drive profitability in the quarter to be reported.

The cruise industry is slowly recovering from negative publicity after a series of mishaps, including virus outbreaks and engine fires. However, in the prior quarter, cancellation or shortening of six voyages hurt Royal Caribbean’s reputation. We believe such negative publicity would affect earnings in the upcoming quarter to some extent.

Stocks to Consider

Other stocks in the broader consumer discretionary sector that have both a positive Earnings ESP and a favorable Zacks Rank include:

Manchester United plc (MANU - Snapshot Report), with an Earnings ESP of +100.0% and a Zacks Rank #2.

MGM Resorts International (MGM - Analyst Report), with an Earnings ESP of +45.46% and a Zacks Rank #3(Hold).

Buffalo Wild Wings Inc. (BWLD - Analyst Report), with an Earnings ESP of +5.04% and a Zacks Rank #3.
 

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