Cruise ship operator Royal Caribbean Cruises (RCL 0.02%) has been having a breakout year. The company has more than fully recovered from the pandemic lockdowns, and its stock has recently reached an all-time highs. With such large stock price gains in a few years, it's fair to wonder whether there's still time to get in on this bull run.
Royal Caribbean's full-year 2023 set the stage for an explosive 2024
Last year marked the first year of operations relatively unhampered by the pandemic. Travel and cruise restrictions, as well as mask and vaccine mandates, had all ended in 2022 or during 2023. As a result of the loosening of restrictions and pent-up travel demand, Royal Caribbean turned in its best year since 2019, along with many other leisure stocks. For the full year, Royal Caribbean reported:
- Adjusted earnings per share of $6.77, which beat estimates
- Free cash flow of $580 million
- Initial 2024 forecasts of $9.50 to $9.70 adjusted earnings per share (EPS), a 40% increase from 2023
Perhaps most importantly, Royal Caribbean refinanced its $3 billion revolving credit facility and $500 million term loans into a new $3.5 billion multiyear credit facility. The company also paid off a high interest loan early, using cash on hand. The net result of these transactions was to strengthen its balance sheet by reducing overall debt levels and streamlining some of its remaining debt.
The company noted in its 2023 annual report that the five best weeks in company history, in terms of bookings, occurred after the close of 2023 and before its earnings report.
Royal Caribbean's record-setting first quarter of 2024
These five weeks built on the solid foundation of 2023, and led to a record-setting first quarter for 2024. The company reported strong revenue, net earnings, and bookings.
| Ticker | Total Revenue | Change | Net Income | Change | Operating Cash Flow | Change |
|---|---|---|---|---|---|---|
| RCL | $3.7 billion | 26.7% | $360 million | 866% | $1.3 billion | No change |
Data source: Royal Caribbean. All changes are shown year-over-year.
In addition to the stellar results for the first quarter, Royal Caribbean projected an even more optimistic picture for the rest of 2024. The company reported a record booked position for the year, and raised the outlook for full-year 2024 that was even higher than the bullish forecast it had issued in its 2023 annual report. As of the end of the first quarter of 2024, Royal Caribbean predicted EPS of $10.70 to $10.90, an increase of more than $1 per share higher than its prior estimate.
Examining Royal Caribbean's current balance sheet and valuation
The past five quarters have undoubtedly been spectacular, and the company has given investors good reason to expect that the last three quarters of 2024 will follow suit. Besides the excellent operating results, Royal Caribbean continued to improve its debt situation. During the first quarter of 2024 it again reworked some of its debt, lowering the interest rate on $1.25 billion in debt, from 11.625% to 6.25%. Besides this, the company was able to extend maturities from 2027 to 2032. As a result of these balance sheet moves, S&P Global upgraded Royal Caribbean's credit rating to BB+.
It's important to remember Royal Caribbean's stock is sitting at all-time highs, having risen over $90 per share in the past year alone. Clearly, this is not an out-of-favor stock. Comparing some traditional valuation metrics with competitor Carnival Corp. (CCL -0.12%) confirms this.
| Ticker | Price-to-Earnings Ratio | Price to Free Cash Flow per Share | Price-to-Book Ratio | Debt-to-Equity Ratio |
|---|---|---|---|---|
| RCL | 15 | 81.2 | 8.3 | 4.5 |
| CCL | 15.9 | 23.5 | 3.6 | 4.4 |
Data source: YCharts. Price-to-earnings ratios are based on forward earnings.
None of these metrics scream "overvalued," especially the price-to-earnings ratio of 15. However, the company is not generating tons of free cash flow (what's left of cash flow after capital spending), and despite its efforts to reduce debt, its balance sheet is still comparatively bloated, as indicated by the price-to-book ratio. For investors looking for exposure to the cruise industry, Royal Caribbean has probably come too far, too fast. At the present moment, Carnival Corp. offers better value, and investors should look to it until Royal Caribbean's stock price pulls back, or its results merit a higher valuation.
