Royal Caribbean Cruises (RCL +0.38%) reported its first profitable quarter in nearly three years, beating estimates and exceeding the company's own guidance. But the stock still trades roughly 57% down from its pre-pandemic highs.
With the cruise industry showing signs of recovery, is it finally time to buy the dip on this cruise line stock? Let's take a look.
The first profit in 12 quarters
The Miami-based cruise line enjoyed its highest revenue in the past 12 quarters thanks to a recovery in demand combined with price increases. Revenue came in at $2.99 billion, almost seven times more than Royal Caribbean posted a year ago.
Adjusted earnings per share landed at $0.26, beating analysts' estimates and exceeding the company's own expectations. It saw continued strong demand from travelers who booked shortly before their departure dates. Enhancements in driving onboard revenue also contributed to the better-than-expected performance. Load factor increased in the third quarter, indicating higher capacities aboard ships.
And profits finally washed ashore for Royal Caribbean, which had a respectable $33 million in net income compared to last year's net loss of $1.4 billion during the same quarter. Third-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) settled at $742.3 million, a remarkable difference from a loss nearly the same size the prior year.
The company said bookings accelerated from the second to third quarters of 2022 at a level "significantly higher" than bookings in the third quarter of pre-pandemic 2019. Based on current demand, the Celebrity Cruises operator expects load factors to remain high in the fourth quarter.
Riding out the storm
Despite its resoundingly good performance in the quarter, Royal Caribbean faces $19.4 billion in long-term debt. The company did pay down $5.6 billion of its 2022-2023 debt obligations in the third quarter, and after a few more profitable quarters, that debt could be significantly reduced.
Other near-term headwinds include inflation and supply chain concerns, primarily from fuel and food costs. These are anticipated to carry through the first half of 2023, keeping expenses high and profit margin strained. Adverse currency-exchange rates have also been a drag on profitability. All things considered, Royal Caribbean expects a drop in revenue in the current quarter to $2.6 billion, down 13% from last quarter.
Although Chief Financial Officer Naftali Holtz expects heightened costs to continue throughout the fourth quarter, he also believes that near-capacity sailings, replenished staff levels, and more relaxed COVID protocols will offset their impact. Fuel rates have already begun to fall from their highs earlier this year.
NYSE: RCL
Key Data Points
Navigable waters ahead
Its 64-ship fleet now fully operational, Royal Caribbean looks to maximize occupancy while keeping costs down.
The future looks bright with 2023 bookings already at historical levels, not to mention at record-high prices. During the third-quarter earnings call, CEO Jason Liberty said, "We continue to expect the business to accelerate as we close out 2022." Will the fourth quarter's performance turn out to be another surprise beat, or is the company underpromising in order to overdeliver? Time will tell.
The third quarter of 2022 already saw 50% more bookings than the third quarter of 2019. That's a pretty remarkable improvement, especially when recalling how COVID brought the cruise industry to a downright halt. With the continued easing of testing and vaccination requirements, Royal Caribbean expects to keep breaking company records.
Is the stock a buy?
Royal Caribbean stock trades roughly 57% down from its January 2020 highs. If the current positive momentum continues, the stock's performance should soon follow the company's. For that reason, I consider it a buy at its current price.
