When the curtain closes on 2025, a mixed year for cruise stocks will conclude. Royal Caribbean (RCL 0.36%) is part of that muddled scenario. At periscope depth, things look all right, as the stock is higher by about 12% year to date.
Beneath the surface, it's a different story. A sell-off that commenced in September and one hastened last month despite a solid set of third-quarter results has the cruise giant residing nearly 30% below its 52-week high. That's a bear market and then some. Given that slide, it's understandable that some investors are willing to let this stock set sail without them.
Royal Caribbean could be sailing toward 2026 upside. Image source: Getty Images.
Nautical references aside, there's no denying this consumer cyclical name has been punished, but an argument can be made the repudiation has been too severe, and that Royal Caribbean could steady in 2026. Let's look at why a rebound could materialize.
With this cruise stock, yield signs are instructive
No, I'm not talking about traffic signs that say "yield," and we're not talking about dividend yield, either. As it relates to cruise lines like Royal Caribbean, "yield" refers to net revenue yield, which gauges sales per average room day when excluding foreign currency effects.
One of the reasons Royal Caribbean tumbled is because investors worried about the yield the operator can extract next year from the Caribbean Sea. That's the industry's most competitive region, and capacity there is high, explaining why investors are concerned. Still, Royal Caribbean believes it can generate 2026 yield growth there of 2% to 3%.
Some sell-side analysts acknowledge investors pensiveness on Royal Caribbean's yield outlook in the region for which it's named, but Stifel's Steven Wieczynski lays out an interesting case. He estimates that based on this company being 60% exposed to the Caribbean, a 1% move in yields there could affect the operator's market value by $1.2 billion, based on a "normal" multiple of 15x. Put simply, if this cruise line can boost Caribbean yields in 2026 by 3%, that could be worth $3.6 billion to its market capitalization.
NYSE: RCL
Key Data Points
Speaking of yield-generating opportunities, Royal Caribbean's river cruise business could check that box, but investors will need to be patient because the operator doesn't take delivery of its first river ships until 2027. Still, it's already sold out nearly all of those voyages while flexing some pricing power relative to established river cruise competitors.
Finances aren't making waves
What may be overlooked amid the stock's recent slide is the solid state of Royal Caribbean's finances. The company is expected to keep gross leverage in the low 3x range, and it has access to ample liquidity by way of a $6.4 billion revolving credit facility.
Royal Caribbean is also offering investors a compelling "twofer." It's reducing debt, which lowers its interest expenses, while growing free cash flow. Both factors are important, but the rising free cash flow supports shareholder rewards, such as the $1 billion buyback plan the company announced in February.
Add those ingredients into a favorable valuation following the aforementioned weakness, and Royal Caribbean could have a recipe with which to restore investors' confidence in 2026.
