Stocks continued to rally this week, with the S&P 500 closing green in 13 of the last 15 sessions. The best-performing concepts are gene editing, hydrogen energy and cruise concept.
Considering the different perceptions of the stock, this time TigerPicks chose $Royal Caribbean Cruises(RCL)$ to have a fundamental highlight to help users understand it better.
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$Royal Caribbean Cruises(RCL)$
Royal Caribbean Cruises' reversal is already here, thanks to the consistent debt repayment and moderating weighted average interest rates.
The robust consumer demand and pricing power are also reflected in its growing gross profit margins, elevated deposits, and raised FY2023 Net Yields/adj EPS guidance.
The RCL Investment Thesis Has Improved Drastically
For now, RCL has reported an exemplary double beat FQ3'23 earnings call, with revenues of $4.16B (+18.1% QoQ/+39.1% YoY) and adj EPS of $3.85 (+211.5% QoQ/+1380.7% YoY).
This is on top of the raised FY2023 adj EPS guidance to between $6.58 and $6.63, with the midpoint suggesting a YoY expansion of +188.06% from FY2022 levels of -$7.50, despite the headwinds from elevated fuel pricing, forex, and ongoing conflicts in Ukraine/ Israel.
If any, RCL's robust pricing power is notably observed in its expanding gross margins of 48.6% (+4.1 points QoQ/+12.8 YoY), well above the FY2019 levels of 45.6% (+1 points YoY).
Consumer demand remains strong as well, with deposits of $5.03B (-11.2% QoQ/+33.4% YoY) in the latest quarter, compared to FY2019 levels of $3.42B (+8.9% YoY).
RCL has also consistently deleveraged its balance sheet, with a moderating long-term debt of $17.6B in the latest quarter (-5.7% QoQ/-7.3% YoY), down by -16.1% from the peak levels of $20.98B, though still elevated compared to its FY2019 levels of $8.28B (inline YoY).
Most importantly, the management focuses on the reduction of variable rate debts to $4.59B (inline QoQ/-38.5% YoY), as a way to manage the headwinds from the elevated interest rate environment, with a consistently moderating FQ3'23 weighted average interest rate of 6.40% (-0.76 points QoQ/-0.79 YoY).
As a result, it is unsurprising that RCL's annualized interest rate expenses have steadily declined to $1.36B (-4.1% QoQ/-3.2% YoY), down from the peak levels of $1.72B, though still elevated compared to FY2019 levels of $408.51M (+22.4% YoY).
For now, the sustained deleveraging also meant that the cruise line's debt maturities of $3B through 2024 are somewhat manageable, based on the robust cash from operations of $3.36B YTD, with its profitability likely to accelerate based on the booking trends thus far.
These developments have suggested that RCL is in a much better shape than it was some quarters ago, with the robust booking trend and pricing power likely to accelerate its deleveraging and balance sheet improvement.
Combined with its expanding FQ3'23 Net Yields of +16.7% from FQ3'19 levels and FY2023 guidance of +13.15% from FY2019 levels, we believe that things are looking much brighter for the cruise liner, for so long that these trends are sustained over the next two years of uncertain macroeconomic outlook.
A note of warning here.
The Fed has guided a normalized economy only by 2026, with the restart of US federal student loan repayment from October 2023 likely to pose some headwinds to the consumer's discretionary spending.
For now, North America comprises 57.4% (-5.8 points QoQ/+0.3 YoY) of RCL's revenues by itinerary in the latest quarter, with it remaining to be seen if the cruise line may sustain the promising booking trends as the industry heads into the winter season.
On the one hand, the impact may not be as severe as expected, since most of its consumers come from a median household income of at least $125K, further aided by the robust labor market and wages. This results in excellent cruise booking levels and doubled pre-cruise purchases through 2024, despite the moderate growth in its capacity by 8%.
On the other hand, investors may want to temper their near-term expectations, especially since the stock is trading at a notable premium, with part of its upside potential already pulled forward.
So, Is RCL Stock A Buy, Sell, or Hold?
RCL Valuations
RCL Valuations
For now, RCL's FWD P/E valuation of 15.58x remains elevated compared to its 3Y pre-pandemic mean of 13.05x and the sector median of 14.57x, implying the stock's notably baked-in premium.
The Consensus Forward Estimates
The Consensus Forward Estimates
Tikr Terminal
Perhaps part of the optimism is attributed to the promising consensus forward estimates, with RCL expected to generate a robust bottom line CAGR of +26.1% between FY2023 and FY2025, compared to its pre-pandemic CAGR of +16.2%.
On the one hand, based on the management's FY2023 adj EPS guidance of $6.60 and the stock's normalized P/E valuation of 13.05x, the stock appears to be trading above its fair value of $86.13.
On the other hand, based on the consensus FY2025 adj EPS estimates of $10.49, there seems to be an excellent upside potential of +34% to our long-term price target of $136.89.
RCL 5Y Stock Price
RCL 5Y Stock Price
TradingView
For now, thanks to the excellent FQ3'23 results and raised FY2023 guidance, RCL has already rallied tremendously by +27.5% from its October 2023 bottom, with the stock likely to retest its resistance levels of $105s.
However, with the macroeconomic outlook still uncertain over the next two years, we are not so bullish as to project a potential breakout ahead, with the stock likely to trade sideways as it grows into its pulled-forward recovery.
We believe that patient and opportunistic investors may reap great rewards ahead, with the management likely to reinstate dividends when the company achieves its Trifecta Goals by the end of 2025: adj EBITDA per APCD of at least $100, adj EPS of at least $10, and ROIC of 13% or higher.
As a result of the potential dual-pronged returns through capital appreciation and dividend income, we are finally re-rating the RCL stock as a Buy.
Interested investors may want to wait for a moderate pullback before adding, preferably at its previous support levels of $90 for an improved margin of safety.
Stock Price Forecast:
Here are the target price forecasts for the next 12 months from analysts.
The 17 analysts offering 12-month price forecasts for Royal Caribbean Cruises Ltd have a median target of 120.00, with a high estimate of 140.00 and a low estimate of 79.20. The median estimate represents a +13.69% increase from the last price of 105.55.
Resource:
https://seekingalpha.com/article/4652598-royal-caribbean-cruises-q3-earnings-finally-buy-improved-upside-through-fy2025
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Comments
๐๐๐$Royal Caribbean Cruises(RCL)$ has overtaken $Carnival(CCL)$ as the world's largest cruise line with market capitalisation of USD 27 billion. It has 26 ships sailing globally under the brand of Royal Caribbean, Celebrity Cruises as well as Silverseas.
Royal Caribbean also owns the largest ships in the world with Wonder of the Seas, the largest, capacity of 6988 passengers, 2300 crew members and 236,837 tonnage.
I am bullish on Royal Caribbean as it has a wide moat in terms of capacity, loyal customers and exciting experiences for its passenger s from huge water slides, rock climbing, fabulous shows to keep its passengers engaged as well as a huge variety of restaurants too.
With an increasing gross margin in its latest Q3 2023 of 48.6%, Royal Caribbean will be able to pay down its sizeable debts sooner than later. I would like to set sail with Royal Caribbean as it sails through the troubled waters and reach safe harbour.
@TigerPicks @TigerStars
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