It's time to get into bottom-feeder mode while another round of skyrocketing fuel costs puts pressure on a number of solid companies. Snooping around the travel industry can be fruitful at times like this. With cruise lines under even more pressure following forecasts of another highly active hurricane season, it's time to check in on Royal Caribbean's (NYSE:RCL) first-quarter report.
Results were far from positive. Revenues declined slightly, and diluted EPS was $0.55, down from $0.64 last year. The lower earnings were due to an 11% increase in costs, the majority of which came from increased fuel prices.
Because the poor results were expected, the more interesting news was that Royal Caribbean's management stuck by its guidance for the year, reaffirming that demand was not slipping. This shouldn't be surprising, considering that cruising has steadily become more popular. Cruises appeal to a wide range of people, because they are all-inclusive and offer tremendous flexibility in the type of vacation travelers can experience. Entertainment and activities for one type of crowd can easily be changed to attract an entirely different demographic. A ship's itinerary can also be changed quickly to adapt to shifts in consumer trends.
But the cruise industry is highly competitive, and Royal Caribbean required significant capital spending over the last few years to build ships with new amenities and to upgrade the existing fleet. Those costs are stabilizing, and free cash flow is rising quickly after being negative in 2003. The company is trading at around 13 times free cash flow.
The market has soured on the industry in the last year and a half, as higher fuel prices and a number of negative stories related to onboard fires, missing passengers, and shipboard viruses have been reported. That fact is revealed in the current P/E of Royal Caribbean and competitor Carnival (NYSE:CCL), both of which are starting to approach the bottom end of their historical ranges. Investors usually aren't attracted to fluctuating commodity prices and bad news, and that has the market throwing the company into the bargain bin. But Foolish investors know that can be a great place to shop.
Philip Durell beats the market by shopping for stocks that have fallen out of favor for his Motley Fool Inside Value newsletter.
Fool contributor John Bluis does not own shares in any company mentioned in this article. The Fool is investors writing for investors.
