Like many beaten-down companies, Royal Caribbean (RCL -0.45%) has been off to a strong start in 2023, jumping almost 30% year to date. That said, the company is still down about 22% over the last 12 months.
Should investors buy the dip or wait until more information becomes available? Let's dig deeper into the pros and cons of this stock.
Analysts expect the cruise industry to boom
While the cruise industry was among the hardest-hit tourism sectors during the coronavirus pandemic, it has been somewhat slow to recover. That might soon change in 2023.
According to Truist Securities analyst Patrick Scholes, the sector is set to finally bounce back to previous levels. His research suggests that industrywide sales will jump by an impressive 50% over 2019 (the period before the crisis).
Royal Caribbean's booking data supports Scholes' conclusions. According to management, the company has seen an acceleration in demand for 2023 sailings, with booking volumes exceeding 2019 records. With consumer interest strong and widespread inflation setting consumer expectations, the company will also have room to pad margins by hiking ticket prices and the rates for food and other onboard offerings.
Can Royal Caribbean manage its debt?
Royal Caribbean needs a big recovery because its current performance leaves much to be desired. In the third quarter, operating income flipped from a loss of $1 billion to a gain of $298.4 million.
While the return to profitability is great news, it's still far below the $890.8 million generated in the corresponding period of 2019. Further, with $19.4 billion in long-term debt, the company will need all the cash it can get.
Image source: Getty Images.
Not only will its liabilities need to be repaid, but they will also generate interest expenses -- a sum that totaled $352.2 million in Q3.
Royal Caribbean is in a tough spot. But investors may want to look at its financial performance in the full context. The company is much better-positioned than its largest rival, Carnival Corporation, which reported a staggering $28.5 billion in long-term debt and an operating loss of $279 million in its third quarter. For investors dead set on buying a cruise stock, Royal Caribbean looks like the obvious choice.
Shares are an optimistic hold
With a forward price-to-earnings (P/E) multiple of 14, Royal Caribbean stock is significantly cheaper than the S&P 500 average of 21. And this is a forward-looking valuation, so it prices in some of the significant top- and bottom-line growth expected in 2023. The company's swing to profitability also puts it ahead of its industry peers.
That said, Royal Caribbean has a massive debt load, which will be a long-term drag on cash flow. As a consumer discretionary company, its operations could also tank during a possible recession. While the company could sail through these challenges, the risk of being hit by another demand-related crisis makes its shares look like a hold right now, although they may be a buy for more daring investors.
