Royal Caribbean Cruises (RCL -0.94%) returned to profitability in the third quarter for the first time since the pandemic, but after forecasting that its fourth quarter will likely show a much larger than anticipated loss, the cruise ship operator is seeing its stock sink.

The results, though, show that there remains significant pent-up demand for voyages. The second-biggest cruise line, whose stock remains 55% below the level it traded at before the COVID-19 outbreak, remains on course to return to profitability. So does that make it a good investment today? Let's see.

Cruise ship at dusk.

Image source: Getty Images.

Returning to the high seas of profitability

On an adjusted basis, Royal Caribbean reported Q3 earnings of $0.26 per share, completely erasing the $1.4 billion, or $5.59 per-share loss last year, and much better than the $0.20 per share analysts expected. Revenue of $2.99 billion was six-and-a-half times greater than a year ago and matched Wall Street's projections. 

Royal Caribbean said the performance was due to a combination of "higher load factors from strong close-in demand, further improvement in onboard revenue, and better cost performance."

The load factors, or occupancy rates, increased to 96% overall, and its Caribbean voyages -- Royal Caribbean's biggest market -- actually hit 105% in the period as booking rates accelerated. (Occupancy rates over 100% mean that three or more people stayed in a cabin.)

This means passengers are making their cruise bookings much closer to their sailing dates than they typically did before the pandemic. There were about 50% more bookings in the third quarter when compared to the same period before the COVID-19 outbreak.

That bodes well for the future as next year Royal Caribbean is experiencing bookings well within the historical ranges it experienced before the pandemic, but at much higher prices. So it's doing the same business, but generating more revenue. Unfortunately, its costs are higher too, and that's what is causing it to forecast a return to losses in the fourth quarter. 

Unfavorable currency exchange rates, higher fuel expenses, and increased interest rates have the cruise ship operator expecting adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $350 million to $400 million, and an adjusted loss of $1.30 per share to $1.50 per share on revenue of $2.6 billion.

The fourth quarter will be a rogue wave

Next year in particular is looking up for the cruise ship company. Just before the pandemic, passengers had been booking voyages for 2020 at a torrid pace, the highest in the company's history. As we all saw, however, the industry was crushed by no-sail orders that extended far beyond virtually every other business that was allowed to reopen.

Well, now that the cruise industry is plying the waters again, demand for travel and tourism is booming. Royal Caribbean said its booking volumes for 2023 doubled during the third quarter when compared to the second quarter, and were considerably higher than it experienced back in 2019.

President and CEO Jason Liberty said, "Our brands, vacation offerings, and fleet have never been stronger and we are well positioned for continued step change in financial performance. Our proven formula for success is unchanged as we grow capacity and enhance profitability while seeking to deliver superior shareholder return."

Setting sail for growth

Royal Caribbean is preparing to meet this new era in cruising with a number of massive new ships in its fleet. It's added nine new vessels since 2019, giving it 64 ships across its various brands, and has 10 more ships on order.

The cruise company is also launching what it calls the Trifecta Program, a three-year initiative designed to increase adjusted EBITDA per available passenger cruise days to triple digits, increase adjusted earnings per share (EPS) to double digits, and achieve return on invested capital (ROIC) in the teens.

Liberty said, "We expect the formula of moderate yield growth, strong cost discipline, and moderate growth of our fleet will deliver a strong financial profile."

As a result, profits might not be as high as investors had been accustomed to before the pandemic, but it could have Royal Caribbean on an even keel financially, one that leaves the cruise stock ship-shape for the future.