Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
It's been less than a month since cruise ship operator Royal Caribbean Cruises (RCL -0.15%) reported its fiscal Q2 2018 earnings -- less than a month, too, since the bankers at Barclays Capital announced they were upgrading Royal Caribbean based on those earnings.
Since that upgrade came out, Royal Caribbean has already gained more than $10 a share (about a 9% increase). This tends to suggest that Barclays was on the right track in recommending it -- and now, Royal Caribbean Cruises is getting upgraded again.
Here's what you need to know.
Image source: Silversea.
Upgrading Royal Caribbean
In an upgrade really reminiscent of Barclays', this morning, analysts at Deutsche Bank announced that they are upgrading shares of Royal Caribbean. One month ago, Barclays said it thought the shares were worth perhaps $145 apiece. Today, Deutsche suggested a $146 target price in a buy recommendation covered on StreetInsider.com (subscription required).
Seeing the share price spike at Royal Caribbean over the past month, Deutsche observed that it appears "investors are continuing to re-engage on cruise stocks." This isn't terribly surprising as Deutsche notes that the "valuation" on Royal Caribbean stock is "undemanding."
Earlier this month, I crunched the numbers and discovered that if Royal Caribbean succeeds in hitting its earnings target range of from $8.70 to $8.90 per share this year, then at the then-current share price of $114, the stock was trading for about 12.9 times current-year earnings. At today's price of $124, the argument's still similar -- at the midpoint on earnings guidance, Royal Caribbean shares sell for about 14.1 times this year's projected earnings.
A Royal review
How does that compare to growth rates? When Royal Caribbean reported Q2 earnings on Aug. 2, the company noted that its earnings had climbed 28% year over year. For the full year, the company guided to more moderate growth of 17%. Analysts who follow the stock, meanwhile, have on average upped their estimates for longer-term (next five years) growth from 14% to nearly 15%.
Any way you cut it, therefore, Royal Caribbean at 14-ish times current-year earnings looks attractively priced relative to its growth rate.
And the situation could be even better than that. One thing Deutsche focused on in its report was the potential for Royal Caribbean's recent purchase of a 66.7% stake in luxury liner Silversea Cruises to accelerate its own earnings growth. "Many sell-side models have yet to incorporate the Silversea investment into 2019 forecasts," writes Deutsche in its note, "(so we expect consensus [earnings growth estimates] to migrate higher)."
A silver lining to a golden report
So what do we know about this "Silversea investment" that Royal Caribbean has apparently made?
Not a lot, actually. As a privately held company, Silversea hasn't previously been required to file financial reports detailing its sales and earnings. Nevertheless, a bit of digging reveals a few pertinent facts. For example, while hardly a household name in America, it turns out that Monaco-based Silversea is actually the world's largest luxury-only cruise ship operator. Royal Caribbean describes Silversea's fleet of nine vessels as "ultra-luxury." Eschewing cabins and providing "all-suite" accommodations, Silversea carries passengers on cruises to Greenland, Antarctica, and the Arctic for prices of $5,000 and up per passenger -- thousands of dollars more than Royal Caribbean usually charges.
Thus, even with a fleet only one-fifth the size of Royal Caribbean's own, adding Silversea to the mix creates the potential for explosive revenue growth at Royal Caribbean.
Royal Caribbean announced its purchase of a two-thirds stake in Silversea in June. Paying $1 billion for a 66.7% stake in a company that it values at a $2 billion enterprise value implies that Silversea's equity is worth $1.5 billion. A Moody's report on Silversea's credit rating, issued early last year, suggested the company had $460 million in 2016 revenue. So it appears that Royal Caribbean paid just over three times sales for its stake in Silversea -- not a huge premium at all for what one presumes must be a more profitable luxury operation, given that Royal Caribbean's own shares sell for 2.9 times sales already.
The upshot for investors
As I've already said, Royal Caribbean stock looks attractively priced at 14 times earnings on 28%, 17%, or even 15% growth. But crucially, Royal Caribbean has expressly excluded any impact of its Silversea purchase from its forward guidance for this year. If there is an impact, though (and Deutsche seems to think there will be), then it's possible Royal Caribbean's earnings could grow even faster than what analyst estimates currently forecast.
And Royal Caribbean stock could be an even bigger buy.
