Tuesday, November 25, 1997

Royal Caribbean Cruises Ltd.
(NYSE: RCL)
Phone: 305-539-6000
Website: http://www.royalcaribbean.com
Price (11/24/97): $47 1/16

HOW DID IT DOUBLE?

Steady seas on a northern voyage have been the itinerary for Royal Caribbean this year. When not riding high after trouncing earning estimates, like it did this summer, the leisure cruise company is swabbing the upper deck after winning a bidding war for niche player Celebrity Cruises.

Love, exciting and new. Come aboard, we're expecting you... Granted The Love Boat took place on privately held Princess Cruises, but it is hard for investors to not have grown fond of Royal Caribbean. An upbeat economy has filled up the ever-increasing capacity of the company. The company continues to add new ships to its fleet above and beyond the Celebrity Cruises buyout earlier this year.

Shareholders are filling their glasses with profits and toasting today's Daily Double.

BUSINESS DESCRIPTION

Royal Caribbean Cruises is the world's second largest cruise line, after Carnival Corp. (NYSE: CCL). After acquiring Celebrity Cruises earlier this year, the company now operates 17 ships with a total of more than 30,000 passenger berths.

With 100 different destinations worldwide, the company specializes in weeklong or shorter cruises with per-diem rates as high as $300. The cruise line is controlled by Oslo-based shipping firm Anders Wilhelmsen and Chicago's Pritzker family.

FINANCIAL FACTS

Income Statement
12-month sales: $1729.1 million
12-month income: $179.5 million*
12-month EPS: $2.59*
Profit Margin: 10.4%*
Market Cap: $3435.6 million
(*Excludes one-time gain)

Balance Sheet*
Cash: $44.8 million
Current Assets: $120.8 million
Current Liabilities: $471.7 million
Long-term Debt: $1429.3 million
(*As of June 30, 1997)

Ratios
Price-to-earnings: 18.2
Price-to-sales: 1.99

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Since starting out the year docked at $23 a share, the shares have quietly steamed upstream. This was not an overnight jackpot at the cruise's casino. Slow and steady won this race, as the company continued to report improving fundamentals and exceeded analyst expectations.

There were a few rocky one-day voyages. In late July shares shot up almost $4 when the company reported second quarter earnings of $0.67 a share, shuffleboarding the $0.63 a share estimate puck clear off the grid.

A month earlier there had been some drama in the high seas. Royal Caribbean announced the purchase of Celebrity Cruises in mid-June. Yet shares fell a week later when it was reported that Carnival had made a more lucrative offer. Like that darn paparazzi, everybody wanted a piece of Celebrity.

In a capital-intensive sector where ships aren't cheap and the economies of scale and consolidating operations are well known, the merger and acquisition activity in the sector has found the big lines gobbling up smaller players to grow their fleets in a more affordable manner than simply building new boats. As a young standout, Celebrity was bound to be bought. Royal Caribbean was the eventual victor, and at a price the company said would be accretive, not dilutive, to earnings.

And that, after all, is yet another reason to raise earnings estimates even beyond the flagship line's outperformance -- and an easy way to chart a course to equity success.

WHERE TO FROM HERE?

Paying for Celebrity's status and the three new ships currently in production is not a tab for the frugal at heart. Cash flow is not enough, and the company has been tapping the markets for capital. In September the company issued 9 million shares in a secondary offering that was priced at $40 5/8. Just last month the company filed for a $500 million debt offering.

The balance sheet is leveraged, with $1.4 billion in long-term debt, but that is common in the sector. However, its debt to equity of 1.26 is five times higher than Carnival's 0.26 ratio. That could certainly prove to be troubling if and when the time comes when berth bookings fall rather than rise as they have.

For now, the smooth sailing on the fundamentals forgives the massive debt coverage. More equity-based offerings rather than debt-based solutions will probably help the company's solvency in the future, and that's probably what the company had in mind with the stock offering back in September.

Yes, the bookings are up and that trickles down in many ways. In an airplane, an empty seat is a lost fare. However, to a cruise ship an empty cabin not only represents nil on the fare, but also lost revenue on the drinks, casino spending, and heavily marked-up shore excursions.

All is good and apparently getting better, but make sure Captain Stubing is steering a heavy throng -- if the fundamentals begin to sink, so will Royal Caribbean's stock price, and at a faster pace than its slow ascent.

-Rick Aristotle Munarriz
(tmfedible@aol.com)

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