Flow Rider and Ripcord attraction on the top deck of Royal Caribbean's Quantum of the Seas.

The Ripcord and Flow Rider attractions on Royal Caribbean's Quantum of the Seas. Image source: Royal Caribbean.

Wall Street was mostly waxing bullish on Royal Caribbean (NYSE:RCL) leading up to Thursday morning's fourth-quarter report, and that was apparently the right call. Shares of the world's second-largest cruise ship operator opened at fresh 52-week highs on mixed quarterly results but refreshingly upbeat guidance.

The numbers

Revenue climbed 0.4% to $1.91 billion, less than the 3% ascent to $1.97 billion that analysts were targeting. It's the only area where Royal Caribbean's report fell short of expectations. A 1% dip in passenger ticket revenue -- accounting for 71% of the revenue mix -- was more than offset by a 4% uptick in revenue generated once folks came on board its vessels.

Royal Caribbean's margins widened as most operating cost line items clocked in lower than the year before. Adjusted earnings soared 28% to $264.7 million, or $1.23 a share. Wall Street was settling for a profit of $1.21 a share.

The financial results are somewhat similar to the margin-widening growth posted by larger rival Carnival Corporation & plc (NYSE:CCL) (NYSE:CUK) last month. Carnival came through with a 6% increase in revenue and a 26% pop in adjusted income for the fiscal quarter that ends a month earlier than Royal Caribbean's period.

Come sail away

Mixed results probably wouldn't have been enough to send the stock higher, but then there was the cruise line's blowout guidance. Royal Caribbean expects net yields to climb by 4% to 6% on a currency-adjusted basis in 2017, up from its 3.9% climb for all of 2016. Its forecast calls for adjusted earnings this year to clock in between $6.90 to $7.10 a share, and that's with unfavorable foreign exchange trends and percolating fuel prices creating margin-gnawing headwinds. Analysts were only expecting an adjusted profit of $6.81 a share.

A lot can happen as the fiscal year plays out, but the outlook is great for the current quarter when visibility is naturally far more reliable since we're knee-deep in the period. The $0.90 a share that it is now targeting based on current fuel pricing, interest rates, and currency exchange rates blows the $0.72 a share that the pros were modeling out of the water.

The narrative for the beat will be that analysts underestimated the cruise industry's earnings power -- a story that's becoming old hat as both Carnival and Royal Caribbean topped Wall Street earnings estimates every quarter during fiscal year 2016 -- but a couple of analysts earned their wings this time.

Rachel Rothman at Susquehanna boosted her price target on the stock from $95 to $99 yesterday. A week earlier it was Steven Wieczynski at Stifel correctly predicting that the guidance for 2017 would be strong.

An eye on the horizon

This doesn't mean that it will be smooth sailing from here on out for Royal Caribbean and Carnival investors. Fundamentals can change quickly. The cruising industry is at the mercy of strong travel trends and the financial stability of retirees. This could also be one industry that doesn't benefit from President Donald Trump's policies. The momentum to lower corporate tax rates is building, but since cruise lines already have tax-advantaged rates given the foreign flagged nature of their vessels they could be targeted on a leveling of the effective tax rate playing field. For now, the outlook is encouraging, but like anyone taking a cruise during storm season it's always smart to keep an eye on the weather.  

Rick Munarriz owns shares of Royal Caribbean. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.