Ports of Fall at Royal Caribbean

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It's not exactly smooth sailing in the cruising industry.

Royal Caribbean (NYSE: RCL) is taking on water, with revenue sliding 2% to $1.46 billion in its latest quarter. The company was able to anchor itself to a profit of $0.01 a share, but it is well short of both the $0.33 a share it earned during last year's fourth quarter and the $0.07 a share that Wall Street was expecting.

The company was pinched on both ends. Between fuel costs per metric ton rising by 11% during the quarter relative to last year and a downturn in bookings that began in September, it's hard to milk margins when you have to discount berths to fill up ships.

The report is worse than the numbers posted by rival Carnival (NYSE: CCL) (NYSE: CUK) last month, though it bears noting that Carnival's fiscal quarters end a month earlier. Travel trends naturally deteriorated in December.

It's not going to get any better in the near term. Bookings have stabilized, though pricing pressures remain. Royal Caribbean is now looking to earn $1.40 a share in 2009, a far cry from the $2.68 a share profit it rang up in 2008 (and the $2.82 a share it earned in 2007).

Net yields -- an industry metric consisting of net revenue per available passenger cruise day -- are projected to fall by 9% to 13% this year.

Cruise operators have flexibility in discounting their cabins. There is incremental money to be made from the casinos, bars, shore excursions, and Steiner Leisure (Nasdaq: STNR) spas. However, the math begins to fall apart if penny-pinching passengers only want rock-bottom rates and then scale back on splurging for extras once onboard.   

The cruise industry will get over this slump. Royal Carribean, NCL, Carnival, and Disney (NYSE: DIS) have bigger and better ships on order, always with an eye for long-term growth goals.

More amenities, expansion into new port cities, and a captive audience are just a few benefits the cruising industry has over conventional hoteliers like Wyndham (NYSE: WYN) or Starwood (NYSE: HOT).

This isn't going to be pretty in the near term. Royal Caribbean investors knew that it was time to strap on the life vests when the company suspended its dividend two months ago. It's now looking to post a loss between $0.30 a share and $0.35 a share in the current quarter, but this is a seasonal softy anyway. The key catalyst now could be government stimulus payouts that find their way into cruise bookings in the telltale summer travel season.

Value investors may be wooed by the current valuation. The stock is fetching less than a third of the company's book value (though its assets are naturally ship-heavy) and just six times its depressed forward profitability. However, the company's debt-chunky balance sheet can capsize if things deteriorate aggressively.