Royal Caribbean Cruises (RCL) stock has been riding a wave of momentum over the past year but recently pulled back, likely reflecting the broader market sell-off. While I’m bullish on the stock but less bullish than I was when covering the stock four months ago — primarily due to price appreciation — I believe robust travel demand, improving financials, and a competitive price-to-earnings (P/E) ratio will take this stock higher. Therefore, it may be time to ride the wave higher.
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Royal Caribbean’s Wave of Momentum
Let’s focus on that momentum. Royal Caribbean Cruises — a global cruise holdings company incorporated in Liberia and based in Miami, Florida — is sailing on with tailwinds. The company has emerged from the pandemic on a wave of demand for travel, holidays, and, notably, experience-based vacations like cruising.
A reflection of this momentum is the hitting of its Trifecta goals — a strategic initiative aimed at enhancing overall business performance — 18 months ahead of schedule. The Trifecta goals included achieving triple-digit adjusted EBITDA per available passenger cruise day, a return on invested capital in the teens, and double-digit adjusted earnings per share (EPS). This three-year plan was originally slated for completion in 2025.
This success can be attributed to the soaring demand for cruises, particularly in popular destinations like Europe and Alaska. The company has seen an increase in bookings, driven by travelers eager to explore these parts of the world.
As consumer interest in cruising continues to rise, Royal Caribbean is strategically expanding its fleet to capitalize on this momentum. The company has recently launched several new vessels, including the Icon of the Seas, which is currently the world’s largest cruise ship and has become the company’s best-selling product ever. Additionally, Royal Caribbean is set to introduce the Star of the Seas in 2025, further enhancing its Icon Class lineup.
The expansion doesn’t stop there; Royal Caribbean has ordered a new ship for its Oasis Class, set to launch in 2028, which will be the seventh of its kind. These new vessels not only increase the company’s capacity but also offer innovative features and enhanced experiences that cater to diverse traveler preferences.
Royal Caribbean Beats Expectations Again
Turning to earnings, Royal Caribbean impressed investors in the second quarter of 2024. The company reported revenue of $4.11 billion, representing a 16.7% increase from the same period last year, surpassing analyst expectations by $60 million. This surge was driven by various factors across the business, including onboard spending, which was up 13.3% year-over-year at $1.22 billion.
Earnings per share (EPS) for the quarter came in at $3.21. That was significantly above the consensus estimate of $2.77 and marked a substantial improvement from $1.82 in the previous year. Responding to this positive momentum in earnings, management raised its full-year adjusted EPS guidance to a range of $11.35 to $11.45, indicating a 68% year-over-year increase at the midpoint.
In a big plus for investors, the company also reinstated its quarterly dividend at $0.40 per share, payable on October 11, 2024, marking the first dividend payment since it was suspended in 2020 due to the pandemic
Pullback In Royal Caribbean Stock Unwarranted
On the back of the aforementioned momentum, Royal Caribbean stock surged to $173.37 per share in July, representing a 52-week high. Notably, the 52-week low is $78.35, highlighting just how far the stock has come over the past year.
However, currently, the stock is trading 10% below its high, reflecting a broader sell-off in equities prompted by concerns of a hard economic landing in the U.S. and the squeezing of the carry trade after the Japanese central bank hiked rates.
So, was the sell-off warranted? Well, the stock does trade at a small near-term premium to some of its peers at 13.4x forward earnings. This premium is slightly is also apparent when we look at the EV-to-EBITDA ratio (10.6x).
However, Royal Caribbean is the least leveraged of its peer group, which includes Carnival (CCL) and Norwegian Cruise Line Holdings (NCLH). Debt represents a third of enterprise value, versus 69% at Norwegian and 63% at Carnival.
Taking this data collectively, the sell-off doesn’t seem warranted, and this is corroborated by analysts’ price targets.
Is Royal Caribbean Stock a Buy, According to Analysts?
On TipRanks, RCL comes in as a Strong Buy based on 11 Buys, two Holds, and zero Sell ratings assigned by analysts in the past three months. The average Royal Caribbean Cruises stock price target is $185.50, implying 19.3% upside potential.
The Bottom Line on Royal Caribbean Stock
Royal Caribbean Cruises stock is trading towards the higher end of its 52-week range, but that simply reflects the improving sentiment surrounding this company. Travel demand, notably experience-based travel, remains robust, and the achievement of its Trifecta goals 18 months early has further bolstered investor confidence. Coupled with competitive valuation metrics, I believe this stock could push higher.
