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Down but Not Out - Royal Caribbean Cruises - RCL

April 25, 2008 | About:
Royal Caribbean Cruises [NYSE:RCL] April 25 close: $31.47

52-week range: $30.11 (Apr. 24, 2008) - $45.17 (Jun. 5, 2007)

Yield = 1.90%

RCL reported excellent March quarter earnings yesterday of $0.35 v. $0.04 but the shares plunged to a new 5-year low on a reduced full-year outlook. Management guided to 2008 EPS of $2.85 - $3.00 versus a consensus view of $3.20. The main culprit is seen as higher fuel prices. RCL has begun charging passengers a daily fuel surcharge and bookings do not seem to be adversely effected so far. The past twelve months' earnings of $3.13 were an all-time record for RCL [through March 2008].

Here is a data table to illustrate RCL's past performance*

Royal Caribbean Cruises Ltd: Key Ratios



Year.......EPS........Avg. P/E .........Price/ Sales ....Price/ Book...... Net Profit Margin...Yearly High

2007.....$2.82........ 14.60............... 1.48............... 1.33...................9.8 %...................$46.40

2006.....$2.94.........13.60............... 1.75............... 1.44................. 12.1 % .................$46.80

2005.....$3.03........ 15.00............... 2.16............... 1.71................. 13.5 % .................$55.20

2004.....$2.26........ 19.40............... 2.80............... 2.27................. 10.4 % .................$55.50

2003.....$1.42........ 16.60............... 1.94............... 1.60................... 7.4 % .................$35.00

2002.....$1.63........ 11.10............... 1.02............... 0.80.................. 10.2 % ................$24.40

2001.....$1.35........ 15.30................0.98............... 0.83................... 8.1 % .................$30.30

* Source MSN MoneyCentral

RCL shares trade right now at just 10.1x trailing earnings of $3.13 - far lower than any of their average P/E levels of the past 10 years. RCL's p/sales and p/bv are also near their lows from 2001 - 2002 when the shares were hit due to the 9/11 terrorist attacks and travel was temporarily halted. Buyers of RCL shares right after 9/11/01 saw their shares go up over 600% from $7.80 to $55.50 at their 2004 high.

Royal Caribbean operates 38 ships presently and has 7 more under construction. Capacity figures to increase by 9.3%, 11.4% and 6.4% in 2009, 2010 and 2011 as the new ships come into service.

The 1.9% current yield is higher than any seen on RCL shares since 2003. The payout ratio is a moderate 20% of net profits.

Should Cuba open its ports to U.S. citizens in the future we could see a big surge in cruises in the Caribbean area. This is a wild card catalyst that is not now figured into any future projections.

Value Line is assuming a conservative long-term multiple of 14 in their 3- 5 year projections. They see RCL earning around $5.00 /share by then. Applying that 14 P/E on even the low-end estimate of $2.85 for 2008 leads to a 12-month target price of $39.90.

That goal price represents an $8.43 gain from today's close or plus 26.8%. If RCL can hit their $3 higher-end earnings goal, then $42 would look achievable. Add in the almost 2% dividend and the total return looks quite nice.

Are those prices realistic? Sure, perhaps they're way too pessimistic. Royal Caribbean shares actually traded between $46.40 and $55.50 at their peaks in each calendar year 2004-2005-2006 and 2007.


Disclosure: Author owns shares and is short puts on RCL.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr. Paul Price's Website


Rating: 3.0/5 (13 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Monday's Wall Street Journal had a nice article on the cruise industry's recent trend toward targeting the much less developed Asian market.

They noted that many Asian employees get only short breaks for vacations from work there versus the 1 - 2 weeks that Americans get. Cruise companies tailoring to that market need to schedule much shorter trips [all < 7 days] to be able to attract business.

This is now starting to be done with great success. The three big players over there are Carnival, Royal Caribbean and Star Cruises.

Here are some interesting numbers concerning their global fleets:

Company......... Fleet Size...Asian Based....2007 P & L

Carnival...................85.............1.............$2.408 billion

Royal Caribbean......37.............1.............$0.603 billion

Star Cruises.............20.............7.............(d0.201) billion

The only company with a substantial presence so far is a very weak competitor that lost money in both 2006 and 2007.

Both CCL and RCL should be able to tap into this expanding market through organic growth in the Asian market and by stealing market share from a weak operator.

Both RCL and CCl seem very cheap to me.
kbodawala
Kbodawala - 6 years ago
RCL and CCL are both well positioned to take advantage of any market due to the mobility of their assets. Both are cheap on a historical basis. It seems the market is putting to much emphasis on the current recession and high oil. The best time to buy these companies is when all looks bleak. It pays to be a contrarian especially in this industry. But the oligopolistic nature of the industry keeps it isolated from cannabalizing itself thru ticket discounting. Capacity increases are also worrying the street but I think the managers of these businesses know better and have increased capacity because they expect and increase in demand in the future. I think it would pay to buy CCL now because the dividend is pretty nice, they can maintain it thru operations and have been opportunistically buying back shares. Anyone with a myopic view will not do well but if you have a longer time horizon you would do well to buy CCL and hold these shares and reinvest the div. In 20 yrs. you will see a nice fat pay day. That by the way is my anticipated holding period but I am only human and maybe motivated to reallocate if another more promising opportunity arises (I hope I am able to maintain my discipline).
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Value expert Guru David Dreman took a new position in Royal Caribbean during Q1.

He bought 26,800 shares @ $35.80 average price/share.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Today's Barrons [Jun. 2 issue] ran a nice piece about RCL.

It's easy to see why investors have abandoned Royal Caribbean Cruises. Record high fuel prices and the slow economy hurt their bottom line. "How much of these obvious risks are already priced in to the stock?," they asked.

RCL shares have fallen 30% this year and are trading below $30 - a depth they haven't seen since 2003. The company trades at just 0.9x book value compared with an average p/bv of 2.3x for other leisure companies.

The shares fetch just 0.96x its 2008 sales, cheap even next to equally hard hit rival Carnival Cruise Lines whose shares sell for 1.62x revenues.

RCL's decimated shares have arguably considered the worst-case scenario yet there is a chance for a pleasant surprise. Barrons notes that cruise companies will bounce back quickly should crude oil drop back and that the tax rebate spending may help sales. A Goldman Sachs survey showed 49% of consumers planned to spend their rebate checks with 12% of that group indicating travel as their usage choice.

Cruises typically go for about 20% less than comparable land vacations. Families often choose cruises as the 'value alternative' during recessionary times.

How cheap have the shares become? RCL trades at just 10.4x projected 2008 earnings, below CCL's multiple of 12.7x and the leisure sector's 14.5x.

The world's second largest cruise operator continues to diversify away from North America with international travelers now about 25% of passengers versus 15% in 2005.

The company has hedged 50% of its fuel expenses for this year and recently instituted a fuel surcharge that has been well tolerated.

Barrons author listed his share price target at $45.

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