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Royal Caribbean Rides on Increasing Demand

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Royal Caribbean Cruises Ltd. (RCL - Free Report) is treading on a growth trajectory, backed by increasing demand for cruises and solid booking trends. The company’s profitability initiatives are also long-term growth drivers. However, increased cost of operations and a cyclical industry are potential headwinds to the company’s revenues and profits.

Although shares of Royal Caribbean have lost 0.6%, slightly underperforming the industry’s growth of 1.4% in the past year, a northward revision in earnings estimates for the current year exhibits analysts’ unwavering confidence surrounding the company’s future earnings potential.

For 2018, earnings estimates have gone up 2% over the past two months. Moreover, Royal Caribbean’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive surprise of 7.34%.


Overall Bookings and Capacity Growth Bode Well

Since the last year, Royal Caribbean has been facing pervasively strong demand from its key markets of operations. All brands and itineraries of the company had been facing increasing demand throughout 2017 and the momentum in likely to continue in 2018 as well. As a result, the company currently has solid bookings for the second quarter of 2018 and the trend is expected to remain on a growth trajectory throughout the current year.

Coming to supply, the company is steadfast in increasing its capacity to match the rising demand and expects to maintain a demand-supply balance throughout 2018. The Caribbean cruise that accounts for more than half of the company’s full-year capacity will feature more Cuba sailings than the last year, and an inaugural winter season for both Symphony and Edge.

Meanwhile, European itineraries, accounting for 17% of the total capacity, have been facing consistent demand. As a result, the product is booked ahead of last year. Also, trends for North America have remained particularly strong, not only resulting in higher ticket prices, but also increasing onboard spend. Asia-Pacific itineraries, accounting for 17% of 2018 capacity, had a particularly strong first quarter, with robust yield growth in Australia, China and Southeast Asia. These itineraries are in a good book position for 2018.

Profitability Initiatives to Boost Earnings

Royal Caribbean has been undertaking profitability improvement initiatives aimed at generating long-term cost savings. In 2014, the company launched its Double-Double program. The program, aimed to double 2014 earnings per share by 2017, bought the company’s return on invested capital (ROIC) to double-digit percentages, and improved revenue yields, control costs and moderate capacity growth.

Management notes that it achieved its targets in 2017, with reported EPS of $7.53 and ROIC rising above 10%. The company expects 2018 EPS to be in the band of $8.70-$8.90, reflecting another year of double-digit growth. Also, the Zacks Consensus Estimate for 2018 earnings is pegged at $8.88, suggesting growth of 17.9% from 2017.

Meanwhile, the company further developed a multi-year period program named 20/20 Vision. The program is expected to serve as a guiding light for the organization over the next three years, as under this program, the company aims to improve its guest satisfaction and employee engagement, while catering to its environmental commitments. These operational drivers are expected to aid in further improving its double-digit return profile and deliver double-digit earnings per share by the end of 2020.

Increasing Costs & Cyclical Industry Pose Concern

Royal Caribbean is shifting its deployment toward Asia, Australia and certain areas of Europe to curtail capacity in the areas with geopolitical risks. The changes related to international distribution system and a shift in deployment for strategic purposes will likely improve its yields. However, it will also increase costs.

Higher-than-anticipated load factors, timing and investment in revenue-generating activities are further adding to the company’s costs. In fact, the company expects net cruise costs, excluding fuel, to be up about 2.5% year over year in 2018. This increase in the cost metric is driven by planned sales and marketing investments, the timing of third-quarter costs and lower-than-expected APCDs due to hurricanes.

The leisure industry is cyclical, as worsening global economic conditions might dent Royal Caribbean’s revenues and profits. Consumer demand for services is closely linked to the performance of the general economy, and is sensitive to business and personal discretionary spending levels. The decline in consumer demand due to adverse general economic conditions, poor travel patterns, lower consumer confidence and high unemployment, are potent headwinds.

Zacks Rank & Stocks to Consider

Royal Caribbean carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry are Lindblad Expeditions (LIND - Free Report) , Six Flags Entertainment (SIX - Free Report) and RCI Hospitality (RICK - Free Report) . While Lindblad and Six Flags sport a Zacks Rank #1 (Strong Buy), RCI carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lindblad Expeditions’ current year earnings are expected to grow 155.6%. Six Flags Entertainment’s 2018 EPS is projected to improve 33.8%. Also, RCI’s earnings for 2018 are expected to increase 52.5%.

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