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Royal Caribbean Pinned at Neutral

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We remain Neutral on cruise operator Royal Caribbean Cruises Ltd. (RCL - Free Report) . Though strong first quarter results and an improving booking scenario are encouraging, an accident that took place on its ship last month and some additional charges due to deployment changes keep us on the sidelines.

Why the Reiteration?

On Apr 25, 2013, Royal Caribbean reported first-quarter 2013 earnings of 35 cents per share, which breezed past the Zacks Consensus Estimate by 75% and the year-ago level by 66.7%. Improvement in top-line coupled with efficient cost control measures boosted earnings during the quarter. Revenues grew 4.2% year over year to nearly $1.9 billion mainly bolstered by higher ticket yields especially in the Caribbean and Brazil.

Despite an uncertain economic condition in Europe, Royal Caribbean has been witnessing strong demand in the region in 2013. The U.S. market is also showing healthy signs in terms of bookings currently. Further, limited supply in the cruise industry will also help the company charge higher pricing.

However, despite these facts, some concerns prevent us from being too optimistic on the stock. In late May, Royal Caribbean’s ship Grandeur of the Seas caught fire and the disaster is expected to cost around 10 cents per share.
Further, near-term geopolitical concerns in Asia due to the antagonism between Japan and China over disputed islands in East China Sea will disrupt some of the Japan-oriented itineraries. While the Asian market continues to expand despite this geopolitical issue, management expects relatively lower revenue yields owing to this disruption.

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