Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Royal Caribbean Group (RCL, Financial). The stock, which is currently priced at 100.18, recorded a gain of 0.83% in a day and a 3-month increase of 26.61%. The stock's fair valuation is $161.12, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Royal Caribbean Group should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.69, and the company's revenues and earnings have been on a downward trend over the past five years, which raises a crucial question: Is Royal Caribbean Group a hidden gem or a value trap?
Altman Z-Score: An Indicator of Financial Health
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Overview: Royal Caribbean Group
Royal Caribbean is the world's second-largest cruise company, operating 64 ships across five global and partner brands in the cruise vacation industry, with 10 more ships on order through 2026. Brands the company operates include Royal Caribbean International, Celebrity Cruises, and Silversea. The company also has a 50% investment in a joint venture that operates TUI Cruises and Hapag-Lloyd Cruises, allowing it to compete on the basis of innovation, quality of ships and service, variety of itineraries, choice of destinations, and price.
Royal Caribbean Group's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Royal Caribbean Group's Altman Z-score reveals Royal Caribbean Group's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Royal Caribbean Group's historical data, 2021: 0.09; 2022: -0.04; 2023: -0.04, we observe a declining trend in this ratio. This downward movement indicates Royal Caribbean Group's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
The Bearish Signs: Declining Revenues and Earnings
One of the telltale indicators of a company's potential trouble is a sustained decline in revenues. In the case of Royal Caribbean Group, both the revenue per share (evident from the last five years' TTM data: 2019: 49.40; 2020: 37.74; 2021: 0.37; 2022: 18.37; 2023: 45.71; ) and the 5-year revenue growth rate (-21.4%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Royal Caribbean Group's products, or escalating competition in its market sector. Either scenario can pose serious risks to the company's future performance, warranting a thorough analysis by investors.
The Red Flag: Sluggish Earnings Growth
Despite its low price-to-fair-value ratio, Royal Caribbean Group's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can indeed suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In Steelcase's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations.
Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity.
Conclusion: A Potential Value Trap?
Given the indicators such as a low Altman Z-Score, declining revenues, and earnings, Royal Caribbean Group, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen . Investors can find stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.
