Royal Caribbean's (RCL) probable cannibalization of its existing fleet, lower visibility on a new class of ships that the company is designing and the strengthening of the U.S. dollar make us cautious. Moreover, the company has cut its full-year EPS guidance range, owing to geopolitical risks in the eastern Mediterranean region.
These disturbances have compelled Royal Caribbean to modify some of its sailings that adversely affected both demand and yield. Hence, we downgrade the stock from Neutral to Underperform.
Our six-month target price of $26.00 per share equates to about 9.1x our estimate for 2011. The target price implies an expected total return of negative 10.0% over that period. Therefore, we recommend an Underperform rating on the shares.
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