Royal Caribbean Cruises Ltd. (RCL) has reported second-quarter 2011 adjusted earnings of 43 cents per share, a penny below the Zacks Consensus Estimate. The earnings showed a strong improvement from the year-earlier earnings of 25 cents.
During the quarter, management identified an error in the previous accounting treatment of interest expense and revised the same. Before the interest expense revision, earnings were 47 cents a share.
The quarter’s earnings came within management’s guidance range of 40 cents to 45 cents per share. In line results came on the back of modest growth in bookings and strict cost control, partially offset by deterioration in pricing caused by disturbance in the eastern Mediterranean region.
Quarter Highlights
Total revenue in the quarter increased 10.4% year over year to $1,767.9 million, which lagged the Zacks Consensus Estimate of $1,786.0 million. The year-over-year increase in revenue was driven by a rise in capacity and net yield.
In sync with the economic revival, net yield upped 3.8% (0.8% on a Constant-Currency basis) year over year. Excluding Mediterranean sailings, net yields increased 9.8% (7.3% on a constant-currency basis). The rise in yield was driven by an 11.8% improvement in net ticket revenue and a 6.5% increase in on-board revenue. Occupancy rate rose marginally to 103.7% from 103.6% in the prior-year quarter. However, both yield and occupancy declined on a sequential basis.
Total cruise operating expenses grew 9.1% year over year to $1.2 billion. Net cruise costs per passenger rose 2.3% excluding fuel (decreased 0.1% on a constant-currency basis).
Financials
At quarter end, the company had total assets worth $19.9 billion versus $19.7 billion at the end of 2010. Royal Caribbean’s net debt was 49.1% of capital compared with 52.5% as of December 31, 2010.
The company declared a quarterly dividend of 10 cents per share payable on August 30, 2011.
Guidance
For the third quarter, Royal Caribbean expects the bottom line to range between $1.85 per share and $1.90 per share. Net revenue yields are expected to increase 5% (up 1% to 2% at constant currency).
Excluding fuel expenses, net cruise costs are estimated to rise 4%–5% (up 2% at constant currency) in the upcoming quarter. Fuel costs are expected to be $202 million.
For full-year 2011, management now expects earnings per share (EPS) in the range of $2.85 to $2.95 (earlier $3.10 to $3.30). Net revenue yield is expected to be up 5% (up 2%–3% at constant currency). Net cruise cost excluding fuel is projected to increase 3% (up 1% to 2% at constant currency). Fuel expenses are expected to be $763 million per metric ton.
Our Take
We are less optimistic on the stock over the short term. The company cut its full-year EPS guidance range due to lingering geopolitical risks in eastern Mediterranean region. These disturbances compelled Royal Caribbean to modify some of its sailings, which adversely affected both demand and yield. Moreover, strengthening of U.S. dollar also remained a concern. Hence, we expect estimates to go down in the coming days.
However, as these threats are short-term in nature, we remain positive on the stock of the world’s second-largest cruise operator based on a host of factors including strong booking momentum in other itineraries, efficient expense control, especially fuel conservation efforts, and the slowdown in industry capacity.
Royal Caribbean currently retains the Zacks #4 Rank, which translates into a short-term Sell rating. However, we are maintaining our long-term Neutral recommendation on the stock.
The company’s biggest competitor, Carnival Corporation (CCL) reported its second quarter earnings of 26 cents, which surpassed our estimate but was below the year-ago earnings of 32 cents.
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