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Royal Caribbean Up to Strong Buy on Solid Earnings Prospects

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Zacks Investment Research upgraded Royal Caribbean Cruises Ltd. (RCL - Free Report) to a Zacks Rank #1 (Strong Buy) on Aug 13, 2014 on the back of decent second quarter results coupled with an increase in earnings guidance for 2014.

Also, Royal Caribbean announced the Double-Double Program during the second quarter earnings call, which aims to increase 2014 earnings per share twofold by 2017 and bring the company’s return on capital to double-digit percentages. Over the past 30 days, the company has witnessed positive estimate revisions for 2014 and 2015.

Why the Upgrade?

On Jul 24, Royal Caribbean posted second quarter results with adjusted earnings of 66 cents beating the Zacks Consensus Estimate by 24.5%. Also, earnings came much ahead of the prior-year figure of 15 cents, driven primarily by higher year-over-year revenues. Further, earnings were higher than management’s expected range of 45 to 55 cents. Though revenues missed the consensus mark by a slight margin, it increased 5.2% year over year, thanks to higher passenger ticket revenues as well as increased onboard spending.

Moreover, the company has a positive outlook for the coming quarters on solid demand for European, Alaskan and Chinese sailings.  Meanwhile, Asian sailings have also exceeded pricing as well as volume expectations. Despite the island dispute between China and Japan, management expects China to account for one-third of its total capacity and generate double-digit yield improvements in 2014 driven by strong booking trends.

Given the second quarter performance and the strong booking trends, the company increased its earnings guidance for 2014 and expects it in the range of $3.40 to $3.50 per share. Meanwhile earnings for the third quarter are expected to be to be $2.20 per share, much higher than $1.71 reported in the year-ago quarter.

In addition to strong booking trends, the bottom line is expected to be driven by the company’s efforts to improve fuel efficiency and thereby reduce fuel costs. Further, Royal Caribbean uses fuel swaps to mitigate the volatility in fuel prices.

Royal Caribbean is pursuing profitability improvement initiatives aimed at generating long-term cost savings. One of these initiatives that begun in 2013 is associated with restructuring and consolidation of global sales, marketing, general, and administrative structure. These initiatives include the consolidation of the majority of the call centers, thereby eliminating 500 shore-side positions and lowering expenses. It also includes establishment of marketing and revenue management teams in fast growing markets. Combined with decline in fuel costs, profitability initiatives would reduce overall expenses thereby boosting profitability.

Moreover, its Double-Double program would help in optimizing revenues and controlling costs. It seems that Royal Caribbean has started recovering from negative publicity after a series of mishaps, including virus outbreaks and engine fires. Given the attempts, the company is expected to continue to make consistent progress.

Other Stocks to Consider

Some other stocks worth considering in the sector include Diamond Resorts International, Inc. , HomeAway, Inc. and International Speedway Corp. (ISCA - Free Report) . All these stocks have a Zacks Rank #2 (Buy).

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