We recently downgraded our rating on Miami-based Royal Caribbean Cruises Ltd. (RCL) from Neutral to Underperform. The second largest cruise company in the cruise vacation industry was downgraded on a host of factors including the cut in full-year earnings per share (EPS) guidance, lingering geopolitical risks in the eastern Mediterranean region, the strengthening of the U.S. Dollar and rising inflation.
Royal Caribbean generates about 50% of its revenue from customers outside the U.S., and most of these guests pay in local currency. Hence, any unfavorable change in currency could impact its earnings. The company’s revenues were negatively influenced by the strengthening of the U.S. dollar in the second quarter of 2011. Hence, as a result of unfavorable currency, net yields for the full year are expected to decline about 50 basis points from its previous guidance.
The company cut its full-year EPS guidance range due to lingering geopolitical risks in the eastern Mediterranean region. This was the region from where the company expected the biggest improvement, but the market suffered the most from geopolitical changes. These disturbances compelled Royal Caribbean to modify some of its sailings directly, which adversely affected both demand and yield.
The company’s biggest competitor, Carnival Corporation (CCL) also reduced it net revenue yield outlook due to route changes resulting from political disturbances in the Middle East and North Africa as well as the earthquake in Japan. Carnival management estimates that this disruption to have a negative impact of 20 cents on fiscal earnings.
While Royal Caribbean’s new ships continue to perform well, going forward we expect them to cannibalize existing fleet sales resulting in pressure on pricing as well as net yields.
Agreement – Estimate Revisions
Based on the above fundamentals, 8 out of 11 analysts lowered their estimates over the last 30 days for the upcoming quarter. For fiscal 2011 and 2012, respectively, 8 out of 10 analysts and 11 out of 15 analysts slashed their estimates. However, while none went for any increment for 2011, estimates for the third quarter and 2012 were raised by two and one analyst, respectively.
Magnitude – Consensus Estimate Trend
Over the last 30 days, we noticed a drastic decline in estimates, which fell 14 cents for the upcoming quarter, 24 cents for fiscal 2011 and 31 cents fiscal 2012. The current Zacks Consensus Estimate for the third quarter is pegged at $1.89.
Royal Caribbean currently retains a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating.
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