Royal Caribbean Strong on 20/20 Vision Program, Risks Stay


(Yahoo finance) As Royal Caribbean Cruises Ltd. RCL approaches the end of its Double-Double program, bookings are at record levels, dividends are at an all-time high, costs have been well managed and guest satisfaction has improved significantly.

Consequently, the company’s shares have rallied 51.9% in the past year, as against the industry’s growth of 25.1%.

The company has thus once again developed a multi-year period program named — 20/20 Vision — that leverages the culture and the discipline instilled by the Double-Double program while including a broader set of goals.

Meanwhile, Royal Caribbean posted mixed third-quarter 2017, wherein earnings topped the Zacks Consensus Estimate while revenues lagged the same. Though strong close-in booking and pricing trends bolstered the quarterly performance, hurricanes had a negative impact on the same.

In fact, the company has solid long-term growth potential but the risks from near-term headwinds might somewhat restrict its growth momentum.

Key Growth Drivers

Given the strength and diversity of its brands and itineraries, the company has successfully captured potential and repeat cruise vacationers and enjoys immense popularity among cruisers.

We note that Royal Caribbean’s Asia-Pacific itineraries have been mostly performing strongly over the past few quarters. Though the China market has been recently experiencing bumps in the road, it is poised to be a long-term growth driver. Per data from the Chinese Ministry of Transport, China’s cruise market is projected to grow to 4.5 million passengers, up from 1 million in 2015. Also, the country is expected to become the world’s second-largest cruise market by 2030, after the United States.

Demand for European sailings, both in the Mediterranean and Baltics, has been particularly strong from North America. Meanwhile, although demand for Caribbean sailings softened as the recent hurricanes moved to the Caribbean and Gulf beginning in late August, virtually all its bookings in the region are back to pre-storm levels.

In fact, the company stated that bookings continue to be very robust. Booking volumes have been up more for sailings that are further out, given the ongoing extension of the booking window. Management noted that they are experiencing strong early booking trends for 2018. Notably, Royal Caribbean is benefiting from its global sourcing model, revenue management strategies and the price integrity program.

Given the consistent increase in bookings, the company is required to increase its capacity. Notably, with upcoming fleet launches like Symphony of the Seas — arriving in spring of 2018 — and Celebrity Edge that debuts in the fall of 2018, it expects to meet this requirement comfortably. Also, Royal Caribbean recently announced that Azamara Pursuit will join Azamara Club Cruises brand, which increases the company’s capacity there and upgrades its capabilities.

Over the next three years, 20/20 Vision is expected to serve as a guiding light for the organization and build on its proven formula for success of modest yield and capacity growth, strong cost control along with efforts to enhance customer advocacy and employee engagement.

Going forward, Royal Caribbean aims to improve its already excellent guest satisfaction and employee engagement while delivering its environmental commitments, under 20/20 Vision program. These operational drivers are expected to aid in further improving its double-digit return profile and deliver double-digit earnings per share by the end of 2020.

Bottom Line

Does this mean that the company has been lying on a bed of roses? Well, not really!

Adverse forex translations, a potential rise in fuel prices and lingering global uncertainties in certain international markets might continue to keep growth at check.

Royal Caribbean as well as the other cruise operators is experiencing a decrease in demand for their China sailings due to restrictions on travel to South Korea, given the recent dispute between Chinese-Korean governments. This, in turn, is resulting in less-than-ideal itineraries and lower pricing. Consequently, the company’s business might suffer due to the volatility of the overall Chinese tourism industry.

Furthermore, higher-than-anticipated load factors, timing and investment in revenue-generating activities are adding to the company’s costs. In fact, Royal Caribbean expects net cruise costs, excluding fuel, to be up about 8.5% year over year in fourth quarter on a constant-currency basis. This increase in the cost metric is anticipated to be driven by planned sales and marketing investments, timing of third quarter costs and lower-than-expected Available Passenger Cruise Days (APCD) due to the recent hurricanes.

The company also faces competition from other cruise operators including Carnival Corporation CCL and Norwegian Cruise Line Holdings Ltd. NCLH.

Despite the headwinds, Royal Caribbean is well poised for growth given its strong fundamentals, strong bookings trend, various strategic initiatives and an expected increase in demand for cruise travel, going forward.

Royal Caribbean currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the industry is Vail Resorts, Inc. MTN holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

For fiscal 2018, Vail Resorts’ EPS is expected to grow 18.8%.

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