Royal Caribbean Cruises (NYSE:RCL) reported stronger-than-anticipated third-quarter results last week and raised its adjusted earnings guidance to approximately $4.80 per share, mostly driven by strong momentum in the Caribbean. The company also announced a $500 million share buyback program, as well as a one-time, non-cash writedown of $399.3 million associated with its Pullmantur brand, which has suffered because of weakness in Latin America.
Aside from the one-time charge, the company had a very strong quarter, reporting adjusted net income of $628.1 million, or $2.84 per share, compared to $492.9 million, or $2.20 per share, in the third quarter of 2014.
"We forecast over the course of a year rather than quarter by quarter," said CFO Jason Liberty in a call with The Motley Fool. "Really what caused it [the company's strong results] this time was better-than-expected pricing for the Caribbean and Europe based on historical patterns."
The company also cited the growth of its Asia-Pacific region, including Quantum of the Seas sailing in China, as well as Anthem of the Seas joining the fleet, adding to capacity, and driving on-board revenue.
Liberty also said that the margin of expectations for delivering a quarter perceived as good versus a bad one can be quite small. "It might be $20 million off of a couple billion dollars in revenue," he explained.
Why a writedown?
The company has been well aware of the weakness in the markets served by its Pullmantur brand, and actually took an impairment on it back in 2012, as well. "We've been seeing red flags on Pullmantur," said Liberty. "We've tried numerous actions. We've tried to right it."
The CFO explained that the market simply could not support the brand at a level that justified the value the company had been placing on it, which led to the writedown. "We made the decision that we needed to rightsize the brand rather than growing the brand."
Why buy back shares now?
Liberty said the company believes its shares are undervalued because of the expected impact of its Double-Double program. "We see this as an opportunity to buy," he said. "If you believe in the Double-Double and where this company is going then these are low prices."
Double-Double is an initiative led by CEO Richard Fain to double the company's 2014 earnings per share by 2017, and increase return on invested capital to double digits. It was launched in July 2015.
The industry is strong now
Royal Caribbean's strong report comes three weeks after rival Carnival Cruise (NYSE:CCL) also reported a good third quarter. Carnival noted in its 10-Q that "fleetwide booking volumes for the first half of 2016 are running nearly 20% higher than the prior year relative to a capacity increase of less than 3%."
Carnival has a positive outlook for the rest of the year, as well, and it plans to keep up the pressure on its competitors by stepping up capital investments.
For the full year 2016, we expect constant currency net revenue yield improvement, and net cruise costs excluding fuel per available lower berth day ("ALBD") could be up slightly, compared to the prior year. In addition, we expect fuel consumption per ALBD to decline 1% to 2% for 2016. Furthermore, we expect depreciation expense to be $1.8 billion in 2016, or approximately $0.20 per share higher compared to the prior year, as a result of our increased capital investments for vessel enhancement projects, exhaust gas cleaning systems and new ship deliveries.
Both Carnival and Royal Caribbean expect growth to come from China, and CCL announced plans to launch a domestic Chinese cruise brand earlier this month. The joint venture, a partnership between Carnival Corporation and China State Shipbuilding Corporation, will be "aimed at accelerating the development and growth of the overall cruise industry in China, which is expected to eventually become the largest cruise market in the world."
It's aggressive and it's working
Double-Double is no small amount of growth to deliver, but Fain believes the company is on track to hit the target. "As we turn the corner into 2016, we have our sights firmly set on our 2017 Double-Double targets," he said. "Next year represents a positive step on that journey."
This quarter is a positive step in that direction, and it appears that, aside from the company's ongoing issues with its Pullmantur brand, that it's well on the way to delivering. Certainly market conditions, and the ongoing development of China, will play a major role in that, but currently, the company appears on course.