One of Thursday's biggest sinkers was Royal Caribbean Cruises (RCL -0.93%). Shares of the popular cruise line operator fell 8%, taking on a lot of water despite what was seemingly a blowout financial performance. Royal Caribbean's second quarter exceeded expectations. The company also raised guidance.
Royal Caribbean continues to be one of the market's hottest stocks. It has more than tripled since the start of last year, even after its post-earnings slide. As strong as the stock has been over the past 19 months, the fundamentals are growing even faster. The stock is cheaper than you think. Thursday's sell-off makes it an even bigger bargain. Let's take a closer look at the fresh numbers and why Royal Caribbean Stock isn't likely to stay down for long.
Making waves
Royal Caribbean posted its second-quarter results on Thursday morning. Revenue rose 17% to hit $4.11 billion for the three months ending in June, just ahead of the $4.04 billion that analysts were targeting. Folks are willing to pay up for a watery escape, and they're spending more now than ever to make the most of the experience once they are on board.
With net yields exceeding operating costs, the bottom line is where a little top-line growth starts to go a long way. Adjusted earnings soared 79% to $882 million or $3.21 a share, well ahead of the per-share guidance of $2.65 to $2.75 it offered up three months ago. It's not a shocker anymore when Royal Caribbean tops expectations. It has now consistently posted double-digit percentage beats since it returned to profitability five quarters ago.
| Quarter | EPS Estimate | EPS Actual | Surprise |
|---|---|---|---|
| Q2 2023 | $1.55 | $1.82 | 17% |
| Q3 2023 | $3.46 | $3.85 | 11% |
| Q4 2023 | $1.13 | $1.25 | 11% |
| Q1 2024 | $1.33 | $1.77 | 33% |
| Q2 2024 | $2.75 | $3.21 | 17% |
Data source: Yahoo! Finance. EPS = earnings per share.
Royal Caribbean announced three goals less than two years ago as its fleet began returning to full operations. The trifecta to be achieved by the end of 2025 seemed ambitious at the time:
- Royal Caribbean was aiming to top $100 in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) per available passenger cruise day. This would shatter its pre-pandemic record of $87 in 2019.
- Another pre-pandemic goal it was hoping to take out was the $9.54 a share it posted in adjusted earnings back in 2019.
- The third piece of its trifecta was to improve its capital allocation and operating income in order to set a new high-water mark for return on invested capital. Its previous record was 10.5%.
It can check off all three boxes over the past trailing 12 months. Royal Caribbean crushed its trifecta 18 months early.
Image source: Getty Images.
Finding value in the haunting
Cruise line stocks have been coasting higher since the lines returned to full operations two summers ago. Royal Caribbean even hit an all-time high this week ahead of its telltale financial update.
It's not just the new stock that was hitting new high-water marks before the market's uninspiring reaction to the update. Royal Caribbean now has $6.2 billion in customer deposits for future sailings, up from the $6 billion it was holding three months ago and $5.7 billion a year earlier. All signs point to more positive surprises in the near term given that kind of future passenger engagement.
Royal Caribbean is ready to share the wealth with its improving liquidity. It's been paying down its debt in recent quarters, and it has finally repaid enough to eliminate restrictions on capital return. It's celebrating that milestone the only way a company can, by reinitiating a dividend. The $0.40-a-share quarterly payout amounts to a yield barely above 1%, but it's just another sign that the cruise stock darling is healing.
Thursday's report was the latest "beat and raise" performance out of the world's second-largest cruise line. It now expects to generate adjusted EPS of $11.35 to $11.45 this year, up from its outlook calling for $10.70 to $10.90 coming out of the first quarters. This is an increase of $0.60 per share at the midpoint, more than just the degree of the second-quarter beat it just posted.
The boosted outlook against the backdrop of Thursday's slide in the stock makes for a compelling contrast. Royal Caribbean closed at a reasonable 15 times the midpoint of the full-year earnings it was expecting three months ago. On Thursday, the multiple based on the new forecast priced the shares at just 13 times 2024 adjusted earnings. With Royal Caribbean's history of issuing conservative profit targets that it can trounce, the stock may be trading for an even lower multiple than it will ultimately earn this year.
