A momentum stock? In this market? Why not: a stock that can hold up under this much downward pressure must be strong indeed. Today’s recommendation, from Argus Research, has only paused its advance over the last few weeks, holding close to its 52-week highs at $35.
“We are upgrading Royal Caribbean Cruises Ltd. (RCL, $34) from HOLD to BUY and setting a target price of $40. We think that current valuation multiples inadequately reflect the higher yields and profitability of RCL’s new ships (Oasis of the Seas and Allure of the Seas), and believe that these ships will enable RCL to leverage operating expenses and enter new underpenetrated markets.
“In addition, RCL was able to raise ticket prices in the third quarter thanks to improved demand for Caribbean cruises, and its earnings should benefit from relatively limited 3%-4% growth in cruise industry capacity over the next four years. We note that cruise operators such as Royal Caribbean and Carnival have also delivered more consistent results and recovered from downturns more rapidly than gaming and hotel companies, likely reflecting the attractive pricing of cruise-based vacations. Over the next two to five years, the company’s prospects appear solid based on favorable demographics, strong demand for cruises, and limited capacity growth. Our long-term rating remains BUY.
Recent Developments
“On October 25, Royal Caribbean reported 3Q12 earnings of $1.68 per share, down from $1.82 in 3Q11. EPS topped the consensus earnings estimate of $1.45, but missed our forecast of $1.71. Revenue of $2.23 billion was down 4.1% from last year, though it still came in slightly above the consensus forecast of $2.22 billion. Due primarily to a 5.4% increase in fuel costs, the operating margin declined from 21.9% to 20.3%. ...
“Management now projects 2012 EPS of $1.85-$1.95, up from a prior $1.70-$1.80, along with a 1%-2% increase in net yields. Reflecting strength in the U.S. dollar (RCL pays many of its overseas expenses with appreciated dollars), management now expects net cruise costs, excluding special items and fuel, to be flat to 1% higher in 2012, down from its previous forecast of 2% growth.
“In its 3Q earnings release, management said that it was negotiating to build a new ‘Oasis type’ ship for delivery in late 2016. According to management, the new Oasis ships have proven to be more efficient and have had higher returns on invested capital than older ships. ...
Valuation
“RCL shares are trading in the upper half of their 52-week range of $18.70-$41.46, and at 17.2-times our 2012 estimate and 13.8-times our 2013 estimate, versus a five-year historical average of 15.1. We believe that prospects for a recovery in net yields and constrained supply are inadequately reflected in the current RCL share price, and are upgrading the shares to BUY. Our target price of $40, combined with the dividend, implies a potential total return of about 16% from current levels.”
- John Staszak, CFA, Argus Weekly Staff Report, 11/15/12