Royal Caribbean Up 24% YTD: Will Cuba Travel Ban Stall Rally?

The first-half of 2019 has been an encouraging one for Royal Caribbean Cruises Ltd. RCL. Year to date, shares of the company have gained 23.9% compared with the industry’s 8.4% rally. The upside can be primarily attributed to higher passenger ticket, onboard and other revenues as well as solid booking trend. However, of late, cruise stocks have been impacted by change in travel policy to Cuba. Let’s delve deeper.

Key Catalysts

Since 2017, Royal Caribbean has been consistently witnessing solid demand from its key markets of operations. Last year, the demand for all its brands and itineraries increased sharply. This trend is likely to continue in 2019. Per management, the Wave Season has seen a solid start and overall booking this year is likely to exceed the highest record in 2018. Accelerating demand is also likely to result in double-digit EPS growth in 2019. The company stated bookings from North America and Australia have shown upward trends.

On the supply front, the company is steadfast in increasing capacity to match the rising demand. Based on the current ship orders and predicted capital expenditure, Royal Caribbean believes its capacity growth for 2019, 2020, 2021, 2022 and 2023 to be 8.6%, 4.1%, 9.0%, 7.7% and 2.8%, respectively. Capacity growth was in double digits in the first quarter of 2019.

Furthermore, Royal Caribbean foresees the major bulk of 2019 capacity to stem from the Caribbean, with Symphony of the Seas sailing year-round from Miami and a full year of sailings on two modernized ships — Mariner of the Seas and Navigator of the Seas. Overall capacity will also increase owing to the addition of Silversea contributing just over 2% to growth. Meanwhile, European itineraries, accounting for 16% of the total capacity in 2019, will remain similar to that of 2018.

These apart, Royal Caribbean continues to make use of digital tools for marketing, product development and enhancement of the consumer experience. These tools include revamped websites, new vacation packaging capabilities, support for mobile apps and increased bandwidth onboard to help its guests remain well-connected while at sea. With busier customers preferring more digital devices that help to save time, introduction of superior Internet bandwidth, online check-in accompanied with radio-frequency identification technology should continue to boost occupancy.

Concerns

Policy Change on Travel to Cuba a Major Concern: Trump administration's policy change on travel to Cuba is concerning. This new restrictions on Americans going to Cuba will have a huge impact on cruise industry at the beginning of summer vacation season as demand for sailings in this region is very high. It will impact Royal Caribbean’s earnings by 25-35 cents in 2019. Jason T. Liberty, executive vice president and CFO of Royal Caribbean, said that “While the affected sailings impact only 3 percent of our 2019 capacity, the extremely short notice period for this high yielding destination amplifies the earnings impact.”  

Policy change on travel to Cuba will also impact other cruise operators like Norwegian Cruise Line Holdings Ltd. NCLH and Carnival Corporation CCL.

While Royal Caribbean is witnessing robust booking trends from almost all of its current itineraries, it continues to face fickle demand from the U.K. In terms of capacity growth, while North America and Australia have shown upward trends over the past three months, overall demand-supply balance is sort of hampered in the U.K. markets, where the company has witnessed soft demand.

Zacks Rank & Stock to Consider

Royal Caribbean has a Zacks Rank #3 (Hold). A better-ranked stock in the same space is SeaWorld Entertainment, Inc. SEAS, carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SeaWorld Entertainment reported better-than-expected earnings in the trailing four quarters, the average being 35.6%.

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Carnival Corporation (CCL) : Free Stock Analysis Report
 
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Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
 
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