Shares of cruise company Royal Caribbean (RCL 0.75%) are up 90% over the past year, and it's easy to see why investors are celebrating. On April 25, the company reported better-than-expected financial results for the first quarter of 2024.
More importantly, management said it expects to have full-year adjusted earnings per share (EPS) of $10.70 to $10.90 this year.
Here's some context for why that adjusted EPS number is important: Earlier this year, when Royal Caribbean reported financial results for 2023, management said it expected adjusted EPS of $9.50 to $9.70 this year. A mere three weeks later, management said that strong demand was causing it to raise its guidance to $9.90-$10.10.
Therefore, April's announcements were already the second time this year that management's outlook has improved for 2024. Furthermore, Royal Caribbean's new guidance implies that adjusted EPS could reach an all-time high in 2024.
Fundamentals improve significantly
In short, the company has experienced a remarkable turnaround since it was forced to dock ships during the COVID-19 pandemic.
RCL Normalized Diluted EPS (TTM) data by YCharts.
Wave season refers to a time period early in the year when cruise bookings are the highest. Royal Caribbean said, "This has been the strongest WAVE season in the company's history from both a demand and pricing standpoint." In other words, cruisers are buying more tickets at higher prices than ever before.
More than this, management for Royal Caribbean went on to say that on-ship spending during cruises is also blowing past expectations. And this is significant, since a meaningful amount of profits comes from onboard spending.
With demand sky-high and profits potentially hitting a new record this year, what should Royal Caribbean investors do now?
Investing in Royal Caribbean today
Business fundamentals are of utmost importance when considering investing in stocks. With this in mind, Royal Caribbean investors should rightly be pleased. As I've noted, people want to cruise and spend money more than ever before. And this is leading to record profits.
A company's financial situation is also important. As many investors know, Royal Caribbean and its cruise-ship peers took on substantial debt to stay afloat during the pandemic. The company still has about $19 billion in long-term debt, which is obviously a lot. However, it's been able to refinance some of this recently at lower interest rates, which is improving its financial stability.
However, investors need to keep in mind that Royal Caribbean stock is already making new all-time highs, as of this writing. This is measured from its price per share, its market capitalization, and its enterprise value.
Therefore, while the business has the potential to reach record adjusted profitability this year, it's fair to say that Royal Caribbean's record-high stock price already reflects this positive development.
Royal Caribbean shareholders should be excited: Record bookings are leading to record profitability, which allows management to get its debt back to more normal levels faster than expected. However, shareholders also need to understand that debt repayment will be the priority, and that potentially resuming its dividend is still a ways off.
In other words, investors shouldn't buy Royal Caribbean stock due to its record bookings, as this is already reflected in its stock price. And investors shouldn't buy shares hoping for a dividend because cash will be directed toward its financial obligations.
The final piece of the puzzle regards growth potential for Royal Caribbean. The cruise line's existing fleet is already fully booked, but it expects to add new ships this year and beyond, increasing its capacity at a single-digit pace through 2027.
This single-digit growth in capacity can provide Royal Caribbean's business with some growth over the next few years. But it likely won't be enough to fuel stock returns in excess of the average annual returns for the S&P 500.
So is Royal Caribbean a buy?
Royal Caribbean's business is better than ever, and management is improving its financial situation, which may be a good reason for shareholders to keep holding. However, with modest growth expected and the stock price already at an all-time high, there are likely other stocks out there with higher upside today.
