My fellow Fool Rick Munarriz offered some great advice in October when he instructed Fool's to Just Take Off! I decided to take him up on his advice and go cruising around the Caribbean -- actually, this trip had been planned for months, but who's counting. This was my first cruise experience, and I must say, it not only met my expectations but exceeded them.
I departed sunny Florida onboard the Celebrity Century, one of Celebrity's mid-sized Premium vessels with a passenger capacity of 1,800. Now, I must admit, I had my concerns about sailing the high seas. Would I fall prey to the dreaded motion sickness? Would the promised smorgasbord of endless buffets and five-course elegant dinners be nothing more than grade-D slop? Would the boat sink like the Titanic and send us all to Davie Jones' locker?
Well, no, no, and no. I quickly adapted to life at sea, ate some of the best food of my young life, including prime rib, filet mignon, coq au vin, and lobster while our boat managed to avoid all icebergs in the Caribbean Sea. What luck!
As I took part in the best this cruise had to offer -- endless food, swimming pools, hot tubs, dancing, exercise facilities, cinema, and Broadway-style shows, without spending a single extra penny -- I had to wonder: How is this company making money? What's more, there seemed to be employees all over the place, waiting on customers hand and foot, while keeping the ship in pristine condition. It was then that I looked over at my friendly neighborhood bartender, or should I say 20 friendly neighborhood bartenders!
There were at least 10 bars on board the ship, all readily equipped with high-priced alcohol. A nighttime trip to deck seven revealed the fully functional casino with black jack, craps, and, of course, money-gobbling slot machines. It was Las Vegas on the high seas.
The profit potential of a cruise company was becoming more clear to me. Fill a boat with people, give them alcohol, gambling, and pricey spa treatments, and watch the money roll in. Then tack on premium-priced shore excursions, costly photographed portraits, and a mini mall of souvenirs and thar be the golden treasure ye lads. However, seeing my fellow shipmate's bar tab wasn't enough yet to convince me that Royal Caribbean Cruises (NYSE:RCL) is a great investment opportunity. For that, we'll need to take a closer look.
Anchors away!
Let's take a look at some of the past performance for Royal Caribbean Cruises:
Sales Growth (year over year)
2002 9.2%
2001 9.7%
2000 12.5%
1999 (3.5%)
1998 36%
Earnings Growth (year over year)
2002 38%
2001 (43%)
2000 16%
1999 16%
1998 81%
Net Margins
2002 10.2%
2001 8%
2000 15.5%
1999 15%
1998 12.5%
Looking out the old porthole reveals rather disappointing sales growth over the past four years. That's not a good sign; I would really like to see consistent, if not increasing, double-digit growth each year. More importantly, earnings growth has been considerably inconsistent as well. While 2002 offered a hearty 38% increase it was ultimately lower than the sales generated two years earlier. A glance at net margins shows the company's ability to meet the minimum 7% requirement I would consider. However, the lack of consistency and the fact that margins are not steadily increasing does worry me.
I'm not ready to throw Royal Caribbean overboard just yet. Perhaps if we dig a little deeper we'll find some buried treasure, and what place would be better to find some loot than in the cash flow statement.
Free Cash Flow
2003 $156 million (through 9/2003)
2002 $180 million
2001 ($1 billion)
2000 ($840 million)
After massive cash flow problems in 2000 and 2001 -- fueled mostly by the delivery of six ships to the company's fleet -- Royal Caribbean seems to have righted the ship in 2002 with positive free cash flow of more than $180 million. However, with a current market value of over $7.2 billion, that puts Royal Caribbean at a very pricey 46.5 times free cash flow.
Argh Matey, there's storm clouds on the horizon. A look at the Foolish Flow Ratio for the six most recent quarters revealed the following:
Foolish Flow Ratio
9/2003 0.24
6/2003 0.26
3/2003 0.25
12/2002 0.20
9/2002 0.20
6/2002 0.19
Well, I think I'm starting to get a little queasy. Pass me the Dramamine. As we can see, the flow ratio has been steadily increasing over the first five quarters, with only a slight decrease in the most recent quarter. This is a disturbing trend that shows Royal Caribbean has been decreasing its working capital efficiency. Giving the benefit of the doubt, a look at the flow ratio in the next quarter will be very telling as to whether Royal Caribbean can maintain a positive trend.
However, I've saved the scariest figures for last. The scourge of the high seas -- long-term debt!
Long Term Debt
2003 $5.2 billion (through 9/2003)
2002 $5.3 billion
2001 $5.4 billion
2000 $3.3 billion
This overload of debt is enough to make any shareholder try to string Royal Caribbean up on the yard arm, or walk the plank for that matter. With $5.2 billion in debt and only $380 million in cash as of the most recent quarter (9/2003), Royal Caribbean has a lot of deep water to cross. With its inconsistent flow ratio, expensive price to free cash flow, and heavy debt load, this is one stock Fools should let drift at sea.
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Jason Matthews thoroughly enjoyed his cruise, with the exception of his sunburn, ouch! He especially enjoyed doing the Duval crawl in Key West. He welcomes your feedback at [email protected]. The Motley Fool is investors writing for investors.
