Wakey, wakey, Wall Street. The market seems to be sleeping on Royal Caribbean (RCL 1.15%), Chewy (CHWY 2.05%), and Sleep Number (SNBR 1.93%). This is your wake-up call.
Chewy and Sleep Number have been disappointing lately, but their weak stock charts are dismissing where the two companies could be in a year or two. Royal Caribbean's stock chart looks great, but the market is still pricing the class act of the cruising industry at a mere 13 times this year's projected earnings. Let's take a closer look at three stocks the market is snoozing on right now.
1. Royal Caribbean
It may seem odd to kick off this list with Royal Caribbean. The stock has nearly tripled since the beginning of last year, now trading just 2% from the all-time high it hit last week. I still argue that the market is snoozing on the cruise line operator because it should be trading higher.
Despite achieving an industry-best 29% revenue growth in its latest quarter and nearly tripling its operating profit, Royal Caribbean shares are fetching just 13 times the midpoint of its recently raised earnings guidance for 2024. The stock's a bargain, trading at a discount to its growth, and the story is even better than its conservative valuation.
Image source: Getty Images.
This is a great time to be a fleet operator. Cruise line stocks may have been dealt the worst hand in the travel industry's poker table when the pandemic hit four years ago, but the major players have more than bounced back. Royal Caribbean's future bookings and customer deposits have never been higher. Margins are widening dramatically. Royal Caribbean is expecting to grow its adjusted earnings by 58% to 61% this year.
The money that seafarers are willing to pay for a high-end cruising experience on Royal Caribbean is far outpacing the operator's cost to provide the experience. Looking ahead to 2025 -- with analyst per-share profit targets rising from $11.42 to $12.67 in just the last three months -- Royal Caribbean is trading for 11 times next year's bottom line. Wall Street is sleepwalking on Royal Caribbean, and it's not sleepwalking the plank.
2. Chewy
If you want a more conventional sleeper opportunity, don't dismiss Chewy's chance to be best in show. The online pet supplies retailer is no market darling these days. It has surrendered half its value over the past year.
Growth investors have set aside Chewy as top-line growth decelerates and its base of active customers gradually contracts. It's not a good look for a once fast-growing e-commerce platform to see its once consistent double-digit revenue slow to 8% and then 4% growth in its two latest quarters. The guidance calls for sales growth to be cut in half again, with a 2% showing in the current quarter. Its user base has also declined slightly in back-to-back fiscal years.
The future could be brighter as Chewy expands internationally and enters new pet-related businesses. Its more than 20 million active customers are an engaged lot, spending an average of 12% more than they were on the site a year ago. Pet ownership trends continue to be long-term bullish, and Chewy is in a prime position to continue gaining market share.
3. Sleep Number
The company behind the unique Sleep Number bed with adjustable firmness settings has been a nightmare for investors in recent years. The shares are down 25% over the past year and a blistering 85% over the last three years.
After a dozen years of positive annual revenue growth, the business was rocked in early 2022 when it announced a pandemic-related chip shortage. Most beds don't require semiconductors, but Sleep Number does to monitor the firmness of its air-chambered mattresses. It also has high-end smart beds that monitor sleep and can change temperature, firmness, and elevation settings when sensing discomfort.
By the time the chip shortage was resolved, Sleep Number found itself with a bigger problem. Folks weren't buying premium mattresses in a climate with rising mortgage rates freezing the real estate market. Sales slipped 3% in 2022, accelerating to an 11% top-line slide last year. Revenue growth has been negative in eight of the last 10 quarters, including the last five reports.
The near-term outlook is still murky. The guidance calls for a third year of declining net sales. The same bedding leader that earned $6.16 a share in 2021 is likely to post an annual loss for the third consecutive year. However, the real estate resale market won't stay depressed forever. Residential transactions should return once the Fed starts lowering interest rates as soon as later this year. In the meantime, you can buy Sleep Number for 2.6 times what it earned three years ago.
