Is It the Right Time to Buy Royal Caribbean?

The cruising industry has faced challenging headwinds due to weak consumer spending and high-profile accidents like those affecting the leading industry player Carnival  (NYSE: CCL  ) over the last few years. But Royal Caribbean (NYSE: RCL  ) is reporting solid performance in such a difficult environment, and the company seems to be heading toward a sunny horizon in the coming years.

A perfect storm
The economic recovery since 2009 is leaving much to be desired in terms of intensity, especially when it comes to consumer spending. Cruise companies operate in a cyclical industry, and discretionary spending on things like vacations tends to be quite sensitive to overall economic growth. When consumers are keeping their wallets closed, businesses like cruise companies tend to be particularly affected.

In addition, a series of high-profile accidents suffered by ships operated by rival Carnival are hurting industry demand and generating increased pricing pressure for different operators. Accidents like those with the Costa Concordia, Costa Allegra, and Carnival Triumph have produced image problems for the industry as a whole in the crucial area of passenger safety, and they have also forced Carnival to aggressively cut prices.

Carnival is the biggest player in the industry, as the company operates more than 100 ships versus approximately 40 ships operated by Royal Caribbean, the second-largest player. The problems affecting Carnival can have a positive effect on Royal Caribbean when it comes to competition for market share in the long term, but they can also be detrimental for the industry as a whole in terms of pricing power and customer trust.

Royal Caribbean is not immune to events that can hurt its image and reputation, either. More than 600 passengers and crew members aboard Royal Caribbean's Explorer of the Seas fell ill this weekend with symptoms that included vomiting and diarrhea, and the ship had to return to shore early.

Royal Caribbean CEO Richard Fain expressed his confidence that customers understand that these kinds of problems are just common illnesses considering the time of year, so they should not have any material impact on bookings. Still, this is certainly not the kind of press coverage the company wants to receive.

Staying afloat
Keeping all these difficulties in mind, the recent earnings announcement from Royal Caribbean looks even more positive. The company's sales for the fourth quarter of 2013 came in at $1.85 billion; this represents a 2.7% increase versus the same quarter in the previous year, and the number was in line with analysts' expectations.

Net yields, a measure of ticket sales and money spent on board, increased by 2.7% in U.S. dollars and by 3.2% on a constant currency basis. Earnings per share were much better than analysts' expectations: Royal Caribbean delivered an adjusted net gain of $0.23 versus an average estimate by Wall Street analysts of $0.18 per share. This was also a remarkable increase versus $0.10 per share in the fourth quarter of 2013.

Perhaps more important, management is optimistic regarding the company's prospects in the medium term. According to Fain in the earnings press release:

Six months ago we said we thought we had reached an inflection point and these figures clearly bear that out. It has been a challenging year, but the fact that we have achieved our guidance from a year ago nicely demonstrates the strength of our business. Despite the lingering impact of 2013's negative media coverage on 2014, the year – and what it portends for future returns – is looking highly promising.

For 2014, management is forecasting a net increase of between 2% and 3% in net yields on a constant currency basis, and adjusted earnings per share are expected to be in the range of $3.20 to $3.40 per share. This represents a whopping increase of between 33% and 42% versus adjusted earnings per share of $2.40 during 2013.

Bottom line
Royal Caribbean has proven its ability to successfully sail through the stormy weather affecting the industry over the last several years. Now the skies are looking much clearer, and the company is in a strong position to generate growing profits for investors in 2014 and beyond. Maybe it's a good time to take a tour in this resilient cruise operator.

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