Royal Caribbean Deals With PR Disasters, Sails Forward

Cruise lines haven't been the most stable businesses lately amid illness outbreaks, sinking ships, and more. While some were hit harder than others, industry giant Royal Caribbean (NYSE: RCL  ) held somewhat steady, and its stock price shows it with an upward trend, if dotted with a few dips. As the company sails out of a difficult 2013 for the cruise industry, there looks to be calmer seas ahead despite a current outbreak on yet another boat. Once Royal Caribbean and its peers can get a hold on quality control, they should be positioned to benefit greatly from a global economic recovery.

Think I'm gonna be sick
It's tough taking an accurate temperature of the cruise business. When reading Royal Caribbean management's conference call transcript, it looks as though 2014 is set to be a better year than 2013 (even though RC stock climbed more than 30% during the year). At the same time, though, Reuters updated its coverage on the Explorer of the Seas -- a Royal Caribbean ship that was bouncing along with more than 600 sick passengers and crew members -- which landed today at a New Jersey port two days early. 

These sickness outbreaks, along with captain negligence and other quality control problems, are what plagued the cruise industry last year and in 2012. All of the companies suffered to some degree from lower demand and Wall Street's wrath. So, while CEO Richard Fain speaks about the encouraging late-stage-bookings figures and how it bodes well for the company's 2014, one has to wonder whether we are reading the same newspaper.

Fain sees a 3% year-over-year yield increase in the coming year, driven by the bookings seen already as well as attractive growth in onboard revenue. On the bottom line, the company expects a massive 40% bump in profits with zero capacity increase.

In its just-ended quarter, Royal Caribbean hauled in $0.23 per share -- $0.03 ahead of internal estimates. Analysts were expecting just $0.18 per share. The recently ended quarter's figures are certainly encouraging and would suggest that consumers are still comfortable on these boats, despite the safety issues.

Smooth sailing ahead?
Fain spoke to the fact that many of 2014's available space was booked in 2013 during a time that the cruise line needed to spend heavy in marketing and promotion to keep travelers interested. While this removes some of the demand risk for the coming year, it also limits how much the company can benefit from a stronger recovery in the industry.

The truth is, Royal Caribbean seems to know how to handle PR nightmares at this point, and even the sick boat that just sailed into Jersey might not affect bookings materially. The company's onboard revenue potential remains attractive as Royal Caribbean continually reinvests in its older boats while introducing new ones regularly. The more features they bolt onto the ships, the greater the earnings potential targeted at the totally captive audience.

Concerning whether it's a buy today or not, Royal Caribbean stock is attractively valued at less than 13 times earnings, considering its peers' valuation and its internal growth projections. Competitor Carnival trades at more than 17 times earnings, while Norwegian Cruise Line trades at roughly 15 times earnings. If it doesn't upset your tummy to think about it, Royal Caribbean might not be a bad stock to own with the wind in its sails.

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