Royal Caribbean Doesn't Cave to Pier Pressure

Royal Caribbean (NYSE: RCL  ) had a rough weekend, as more than 600 passengers and crew members on the Explorer of the Seas fell victim to a gastrointestinal illness.Thankfully, the seas aren't as rough this morning after the cruise line posted encouraging quarterly results. 

Revenue rose 3% to $1.854 billion as guests spent more money once onboard than last year. The bottom-line results showed far more dramatic improvement, with adjusted earnings more than doubling to $0.23 a share. Analysts were only holding out for net income of $0.18 a share, but that isn't a surprise. Royal Caribbean has sailed past the prognosticators in each of the four previous quarters.

The outlook for 2014 is encouraging. Royal Caribbean reported that bookings are in line with historical patterns. There's pricing pressure in the Caribbean, where a desperate Carnival (NYSE: CCL  ) is still discounting berths to fill its vessels after several embarrassing, if not tragic, journeys over the past two years. However, Royal Caribbean is experiencing firming rates in Europe and Asia. It now sees a profit of $3.20 to $3.40 a share in the year ahead, while analysts are presently docked at $3.17 a share. When we factor in the undeniable trend of Royal Caribbean consistently coasting past its own guidance in recent quarters, it wouldn't be a shock to see it earn more than it is publicly projecting.

Royal Caribbean is attractively priced here. It's fetching just 14 times the midpoint of projected profitability, and the 2.1% yield is a welcome bonus for income investors. Carnival may pack a more bountiful 2.6% yield, but it's out of favor with passengers and trades at a lofty 23 times this year's expected earnings. Norwegian Cruise Line  (NASDAQ: NCLH  ) has been public for a year, and while it is growing faster than Carnival and Royal Caribbean, it trades at 16 times this year's profit target and has yet to start shelling out quarterly dividends. 

This is good time to consider buying into Royal Caribbean. Don't let the Explorer of the Seas mishap scare you away.

The Centers for Disease Control and Prevention reported on Sunday that 577 passengers and 49 crew members aboard the Explorer of the Seas began experiencing vomiting and diarrhea during the 10-day voyage. That's a sliver of the 3,050 passengers and crew of 1,165, but the contagious nature of the malady was enough to send the ship back to its home port two days early. These incidents happen from time to time across all cruise lines. It's an unfortunate event, but it's not going to rough up Royal Caribbean's reputation to the level that Carnival has seen since its series of disrupted sailings in 2012 and 2013. 

It's the right time to buy into the industry. The economy is showing signs of life, and Carnival will eventually repair its reputation to the point where all players can start increasing their prices on Caribbean sailings. Royal Caribbean is the cheapest of the three on an earnings basis, and its recent streak of blowing Wall Street's profit estimates out of the water suggest that the stock will be a market beater in the near term.

Bon voyage, investors.

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