To The Moon

$Royal Caribbean Cruises(RCL)$

Royal Caribbean Cruises (RCL) is currently trading around $246.28 per share, with a market capitalization of $66.2 billion. Over the past year, the stock has experienced a significant 115% increase. Looking at the last five years, pre-pandemic prices were around $133, and the stock dropped by 80%, but it has since rebounded, surpassing pre-pandemic levels by 92%.

Today, I will analyze whether Royal Caribbean is a buy using multiple valuation methods: the discounted free cash flow model, the comparable company model, the dividend discount model, and the Ben Graham formula for intrinsic value. To begin, entering the ticker RCL into my automated stock valuation spreadsheet loads the latest financial data, allowing for a deeper dive. For more details, check my Patreon, but let’s focus on the stock itself.

Earning Overview

In the third quarter of 2024, Royal Caribbean Group reported robust financial results, surpassing analysts' expectations. The company achieved earnings per share (EPS) of $4.21, with an adjusted EPS of $5.20, driven by stronger pricing on close-in demand, continued strength in onboard revenue, and lower costs due to timing.

Total revenues for the quarter reached $4.9 billion, marking an 18% increase from the same period in the previous year. Net income stood at $1.1 billion, or $4.21 per share, while adjusted net income was $1.4 billion, or $5.20 per share. Adjusted EBITDA was $2.1 billion.

Fundamental Analysis

The company reported a load factor of 111% for the quarter, indicating strong demand and high occupancy rates. Gross margin yields increased by 13.4% as-reported, and net yields rose by 7.9% in constant currency and as-reported, compared to the third quarter of 2023. Gross cruise costs per available passenger cruise day (APCD) increased by 1.3% as-reported, while net cruise costs, excluding fuel, per APCD increased by 4.0% in constant currency and as-reported.

Guidance

In response to these strong results, Royal Caribbean raised its full-year 2024 adjusted EPS guidance to a range of $11.57 to $11.62, reflecting the company's confidence in sustained demand and pricing power.

In the third quarter of 2024, Royal Caribbean Group reported strong financial results, with an adjusted earnings per share (EPS) of $5.20, driven by robust demand and higher onboard spending.

At $246 per share, the company has a P/E ratio just under 26, which is lower than the market average of around 31. With earnings per share of $9.48 and a beta of 2.59, Royal Caribbean is considered a volatile stock. Analysts have rated it as fairly valued with a target price of $236. The company does pay a dividend, reinstated after the pandemic, with a yield of 6.6% ($1.63 per share annually), paid quarterly. To receive the dividend, investors must buy shares before December 20, 2024.

For the fourth quarter of 2024, the company provided the following guidance Adjusted EPS: Projected between $1.40 and $1.45. Impact of Hurricane Milton: The company anticipates a $0.24 per share impact on Q4 earnings due to Hurricane Milton.

Free Cash Flow

In the third quarter of 2024, Royal Caribbean Group reported a free cash flow of $1.082 billion, a significant improvement from the same period in the previous year. This positive cash flow performance reflects the company's strong operational results and effective cost management strategies.

Cash and cash equivalents

Additionally, as of September 30, 2024, Royal Caribbean's liquidity position stood at $3.9 billion, which includes cash and cash equivalents and undrawn revolving credit facility capacity.

Risk and Challenges

Royal Caribbean’s net income is strong, with an all-time high of $2.6 billion in profit for 2023, recovering from losses in 2020-2021. However, the company has struggled with free cash flow, failing to maintain consistent positive cash flow since 2019, which was impacted by the pandemic.

Looking at the numbers, revenue has reached an all-time high of $15.14 billion. Despite the pandemic-related setbacks, the company has made a solid recovery, with a forecast of $16.5–18 billion in revenue growth. Analysts are predicting a 23% growth in sales next year. Operating cash flow is positive again, but high capital expenditures have limited free cash flow.

Valuation

In terms of stock valuation, the discounted free cash flow model indicates that the stock is undervalued at around $4 per share, which is not ideal. Using the dividend discount model, Royal Caribbean has restarted its dividend payments, which is a bullish sign, though it needs to continue increasing them for further confidence.

The Ben Graham formula suggests the stock is undervalued despite the higher inflation rate, with a target of $269, a slight buy recommendation, though the intrinsic value remains lower at $269–$300, depending on future inflation adjustments.

Finally, when compared to Carnival Cruise Lines (CCL) and Norwegian Cruise Lines (NCLH), Royal Caribbean has the highest enterprise value, revenue, and profit margins, but its price-to-sales and price-to-book ratios suggest it may be slightly overvalued compared to its competitors.

Market Sentiment

Recent analyst actions include Truist raising Royal Caribbean's price target from $204 to $272, citing strong future bookings and favorable pricing trends. Overall, the market sentiment for Royal Caribbean Group remains optimistic, supported by robust financial performance and favorable industry trends.

Conclusion

In summary, while Royal Caribbean is performing well, especially post-pandemic, its stock may not be a buy at current levels when compared to competitors. The stock appears to be at an all-time high, and future growth potential could be limited. For those looking at Carnival and Norwegian, it remains uncertain whether they represent better buying opportunities.

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