Shares of Royal Caribbean Cruises (RCL) have fallen 37% from their recent highs. The shares have been under immense pressure due to the recent Coronavirus outbreak. Many fear traveling will come to a complete stop and any unnecessary vacations will be put on hold. However, many of these bookings are made in advance, so it is more than likely that the effects will be delayed. However, while there may be a period of softness, moving into the summer months the virus should see a decline in infection rate. This will help promote the feeling of safety and travelers will once again resume their bookings. While I expect an earnings hit, the important factor to remember is that ultimately, the virus will likely pass and investors would have had a great buying opportunity. We take a look below to see if the shares are now worth buying.
Royal Caribbean operates in an industry with few players. It has its largest peer Carnival Cruises (CCL) and a smaller peer Norwegian Cruise Lines (NCLH) that are both public and compete in the space. Each has its strengths which make them appeal to their customer base.
Carnival Cruises owns and operates many brands besides its namesake. The Carnival brand itself tends to be more family-oriented and competes directly with Royal Caribbean. Norwegian is typically smaller and a bit higher priced for a more exclusive experience. It tends to appeal to a higher aged demographic.
Royal Caribbean operates under its own name as well as the Celebrity, Azamara Club, Silversea, TUI cruises, and Pullmantur names. The company currently has 61 ships in its fleet with 17 more expected to be put into service in the coming years. In 2019 the company carried 6.5 million passengers up from 6 million in 2018. The expanded capacity of course helps increase revenues, routes, and service. However, demand needs to be present for the return on investment to be worthwhile.
Recently the company reported results that showed growth was still present. At first glance a miss on both the top and bottom line appear to make results look weak.
Source: Seeking Alpha
Revenue grew 8% which was quite healthy. While net income declined year over year, it was due to one time events such as hurricanes and the cancellation of trips to Cuba.
The company reported full year earnings of $9.54 per share.
Source: Earnings Presentation
This represented 8% earnings growth over 2018 earnings of $8.86. Quite impressive considering the cancellations of Cuba cruise lines and other impacts. The company should continue to see growth going forward however it has warned that the Coronavirus could impact earnings by $0.65 in 2020. We may even see these estimates get revised higher. Originally the company had guided for earnings of $10.40-$10.70 for the year. The good new is that if $0.65 is all that earnings are impacted, the company would still see a mid digit earnings growth number for the year.
The company has been steadily growing revenues and earnings for the last several years.
It has 2020 goals of earnings per share of $20. This would be quite impressive given the short number of years away this is and the current price shares trade at.
Looking at the balance sheet, the company could work to improve its financial condition to be considered a safer investment.
The company has less than $250 million in cash on hand and $8 billion in long term debt. The current ratio is astonishingly low at 0.15x. The company has to continue to make investments into its new ships and current ships to attract customer leaving it in a capital intensive position. This could become a problem should earnings be impacted for any extended length of time.
Looking at its 5 year historical average valuation levels, we can identify whether or not shares offer a discount compared to their own history.
The shares currently offer a discount to their average P/S, P/E, P/CF, P/B, and forward P/E. However, some of these metrics could change as earnings guidance is impacted by the virus issue. If the virus sees containment, than currently shares offer an enticing entry point.
Compared to peers, we can see how valuation stands for Royal Caribbean.
Data by YCharts
Currently, Royal Caribbean trades at a premium to its peers, however, the valuation gap appears to be the lowest it has been in a while on some metrics. With P/S ratio and forward P/E coming down to almost the same levels as the less stellar operators in the space.
Lastly, looking at historical yield, we can identify if shares are offering an above average dividend yield.
Currently shares offer a 3.79% yield, this yield is so abnormally high that it can't be measured how often is was offered in the company's history. The average yield for shares is 1.72%. This means currently, investors can get a yield that is almost double the average. The dividend appears to be well covered as well with a payout ratio of around 30%.
Source: Seeking Alpha
The company has been raising its dividend for the last 7 years and at an attractive pace. Should this trend continue, investors purchasing shares at current levels could lock in a yield on cost of over 4%.
While the impact from the Coronavirus could be significant and results could become pressured, I believe it will be contained. Significant progress on vaccines are already being made and in time the issue will pass. for investors with a higher risk tolerance looking to take advantage of a negative situation currently, now may be the time. While it may be hard to time the bottom, starting to dip your toe in the water and building a position in this cruise line operator could be a good move. The shares offer below average valuation levels and an above average yield. While it may take time for shares to recover, an enticing dividend is paid to wait. I will look to possibly start a position in the near term.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RCL, CCL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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