Will Royal Caribbean’s (RCL) Q3 Earnings Beat Estimates?

Florida- based Royal Caribbean Cruises Ltd. RCL is set to report third-quarter 2015 results on Oct 23, before the market opens.

In the last quarter, the company posted a positive earnings surprise of 16.67%. In fact, Royal Caribbean has posted positive earnings surprises in three out of the trailing four quarters with an average positive earnings surprise of 9.51%.

Let's see what's in store this season.

Royal Caribbean expects adjusted third-quarter earnings per share to be $2.70, up from $2.20 reported a year ago.

Given the strength and diversity of its brands and itineraries, the cruise operator has successfully captured potential and repeat cruise vacationers. Strong booking and demand trends, especially for Europe sailings, should boost revenues in the to-be reported quarter. Despite a slowdown in the Chinese economy, the company's business is likely to benefit from the solid growth in the cruise industry in Asia.

Royal Caribbean has deployed more efficient hardware, including propulsion and cooling systems that improve fuel efficiency. These would, however, increase the company's expenses and hurt third-quarter margins. Further, revenues are likely to be affected by lower onboard spending by non-U.S. tourists due to the strengthening U.S. dollar.

Our proven model does not conclusively show that Royal Caribbean is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: The company’s Earnings ESP stands at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $2.71.

Zacks Rank: Royal Caribbean’s Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Here are some companies in the leisure and recreational services industry and consumer discretionary sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Norwegian Cruise Line Holdings Ltd. NCLH, with an Earnings ESP of +1.48% and a Zacks Rank #1.

Boyd Gaming Corporation BYD, with an Earnings ESP of +20.00% and a Zacks Rank #1.

Melco Crown Entertainment Limited MPEL, with an Earnings ESP of +10.00% and a Zacks Rank #3.

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