Royal Caribbean (RCL) Well Poised to Grow, Macro Woes Remain – Zacks.com

On Mar 3, we issued an updated research report on Royal Caribbean Cruises Ltd. (RCL - Free Report) .

Serving over five million passengers annually, Royal Caribbean enjoys significant brand recognition, while its strong relationship with travel agents makes it one of the leading cruise companies in the U.S.

Demand Across Geographies

The companys Asia-Pacific itineraries have been mostly performing well over the past few quarters. As a result, the company has been required to increase its capacity in the region.

In Europe, while demand in Northern European and Western Mediterranean region has been strong, the Eastern Mediterranean region has been experiencing weakness because of various geopolitical issues. Thus, the company is making several changes to its itinerary mix in 2017 that will adapt exposure accordingly.

Meanwhile, overall demand for cruising in North America continues to be solid, while Caribbean and Alaskan itineraries are all poised to have a strong year and produce solid yield improvements in 2017. Thus, majority of the capacity growth has been recorded in North America.

Notably, at this point of time, the companys 2017 itineraries are booked ahead of last year in both rate and volume across all major markets. Moreover, Royal Caribbean is expecting strong yield trends, going ahead. These trends, along with a positive outlook for Australia and a solid booked position in China for the first half of 2017, are preparing the company for robust growth in the year.

Additionally, strong booking trends witnessed for new ships launched by the company further lend support to a solid outlook for this year.

Profitability & Technological Initiatives

Royal Caribbean has undertaken profitability improvement initiatives aimed at generating long-term cost savings. The company has entered the final phase of its Double-Double program launched in 2014. Management believes that the program has mostly done what it set out to do bookings are at record levels, dividends are at an all-time high, costs have been well managed and guest satisfaction has improved.

The company has also increased its yield to cost metrics via the deconsolidation of its stake in Pullmantur Group. Other initiatives to reduce costs include carrying out home porting out of secondary cities for some of its bigger vessels, improving fuel efficiency of ships to reduce fuel usage and using fuel swaps to mitigate the volatility in fuel prices.

Technological upgrades including revamped websites, new vacation packaging capabilities, support for mobile apps, increased bandwidth onboard and streaming WiFi, are also enhancing guest experiences, thereby driving occupancy.

Potential Headwinds

Currently, the company is incurring higher costs in relation to its restructuring initiatives and consolidation efforts. Though these efforts are expected to benefit the company in the long run, they are putting pressure on near-term margins and earnings.

Moreover, as fuel prices are trending upward and the U.S. dollar continues to strengthen against the companys basket of currencies, Royal Caribbean expects a negative impact of 10 cents per share on 2017 earnings, due to a combination of these factors.

Further, macroeconomic concerns in certain international markets like Europe and China could put pressure on the top line in the near term. Meanwhile, increasing competition from other cruise operators such as Carnival Corporation (CCL - Free Report) and Norwegian Cruise Line Holdings Ltd. (NCLH - Free Report) could also limit upside potential.

Bottom Line

Despite certain headwinds in the near term, the fact remains that Royal Caribbean is well poised to grow in the long run. Notably, the company has outperformed the Zacks categorized Leisure & Recreation Services industry in the last one year. While the industry grew 14.1%, shares of Royal Caribbean recorded a gain of 29.6% over the same time frame.

Further, earnings estimates have also been trending upward lately, reflecting optimism in the stocks prospects. In the past 60 days, current-quarter and current-year estimates have moved north by 31.4% and 3.5%, respectively.

Thus, Royal Caribbean currently carries a Zacks Rank #2 (Buy). You can see the complete list of todays Zacks #1 Rank (Strong Buy) stocks here.

Another Stock to Consider

If you are interested in the Leisure & Recreation Services industry, here is another favorably placed stock you can consider:

Marcus Corporation (MCS - Free Report) currently sports a Zacks Rank #1. It has seen current quarter and current-year estimates increase 11.1% and 7.9%, respectively, over the past month. Moreover, the companys long-term growth estimate is pegged at 15% while the industrys average stands at 12.2%.

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Royal Caribbean (RCL) Well Poised to Grow, Macro Woes Remain - Zacks.com