On Jan 6, Zacks Investment Research upgraded Royal Caribbean Cruises Ltd. (RCL) to a Zacks Rank #1 (Strong Buy).
We are encouraged by Royal Caribbean’s prospects after the U.S. government recently announced that diplomatic relations with Cuba will be reestablished, going ahead. This should lead to travel restrictions to Cuba being lifted, which will in turn boost the cruise operator’s revenues to some extent.
In fact, Royal Caribbean has been performing well for some time now as strong earnings growth of 32.7%, over the past 12 months, resulted in a 77.8% rise in stock price over the past year, outperforming the S&P 500 Index during the same period.
Easing Cuba Travel Restrictions and Strong Booking Trends for 2015 to Drive Earnings
Given the strong early bookings for 2015, the company expects the trend to continue. Moreover, booked load factors and APDs are higher compared to the year-ago period. The company is experiencing strong booking trends in North America and Europe and also indicated that double-digit yield improvements in Europe and China sailings continue to offset the effects of the highly promotional Caribbean environment. The company is optimistic in view of the recent trends and expects 2015 to be the sixth consecutive year of yield growth.
Also, we are encouraged by Royal Caribbean’s Double-Double Program (announced during the second-quarter earnings call) which aims to increase 2014 earnings per share figure twofold by 2017 and bring the company’s return on capital to double-digit percentages.
We believe that with fuel prices down sharply, the business in Caribbean improving, the company is well on its path to achieve its goal outlined under the Double-Double Program. Further, plans to increase trade and travel between the United States and Cuba should prove a boon to the cruise company. Cuba boasts several ports and scenic outdoors, which should gain popularity among U.S. tourists once travel restrictions are eased.
Robust Third-Quarter Earnings
Royal Caribbean’s adjusted third-quarter earnings of $2.20 per share beat the Zacks Consensus Estimate by a penny and were up 29% year over year. Total revenue increased 3.3% year over year to $2.39 billion due to higher passenger ticket revenues as well as increased onboard spending.
Such a trend of strong earnings growth, along with a positive outlook for 2015, prompted our upgrade.
Other Stocks to Consider
Other companies in the same sector with a favorable Zacks Rank include Vail Resorts Inc. (MTN), Carnival Corporation (CCL) and The Marcus Corporation (MCS). While Vail Resorts sports a Zacks Rank #1, Carnival and Marcus Corporation carry a Zacks Rank #2 (Buy).
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