It's been a good week for Royal Caribbean Cruises (RCL -1.90%) investors. Shares of the world's second-largest cruise line operator hit another all-time high on Tuesday. The stock that more than doubled last year is up another 32% so far in 2024. The shares are up a blistering 245% since the start of last year. Things could get even better later this week.
Royal Caribbean will step up with its second-quarter results on Thursday morning. There's a lot riding on the fresh financials, but the cruise line with a fleet of 68 ships across a couple of different banners has more than just momentum on its side. Demand has never been stronger for Royal Caribbean and its peers Carnival (CCL -2.26%) and Norwegian Cruise Line (NCLH -2.24%). The tailwinds are there. Let's size up Royal Caribbean's prospects heading into its quarterly update and see where the potential headwinds can shift the stock out of cruise control.
The water's fine
A stock hitting an all-time high just before it reports earnings can be a red flag. Expectations are going to be high, but Royal Caribbean has been up to the task lately. Analysts see revenue climbing 19% to top $4 billion, just ahead of the better-than-expected 18% year-over-year growth that Carnival posted last month. They also see Royal Caribbean's net income soaring 51% to $2.75 a share, a figure that keeps inching higher. Wall Street pros were modeling a second-quarter profit of just $2.37 a share three months earlier.
If a 51% jump in profitability seems ambitious, history is on its side. Royal Caribbean has posted double-digit percentage beats in each of its last four quarters.
| Quarter | EPS Estimate | EPS Actual | Surprise |
|---|---|---|---|
| Q2 2023 | $1.55 | $1.82 | 17% |
| Q3 2023 | $3.46 | $3.85 | 11% |
| Q4 2023 | $1.13 | $1.25 | 11% |
| Q1 2024 | $1.33 | $1.77 | 33% |
Data source: Yahoo! Finance. EPS = earnings per share.
The 33% beat in its previous outing indicates that the gap is widening between the cruise line's reality and Wall Street estimates. Carnival also saved its biggest beat of the year for its latest quarter. An impressive industry observation is that Royal Caribbean, Carnival, and Norwegian Cruise Line have delivered double-digit earnings percentage beats in 11 of their 12 quarterly reports over the past year. The lone holdout was Norwegian with a rare miss two quarters ago.
It wouldn't be a surprise if Royal Caribbean exceeds analyst targets again on Thursday morning. The real test will be how other key metrics hold up and the extent of any potential guidance boosts. This is what can take a stock that has never traded as high as it is right now even higher.
Image source: Getty Images.
These are uncharted waters
Royal Caribbean isn't the largest cruise line operator by revenue or fleet size. However, it commands a higher market cap and enterprise value than its larger rival Carnival. This would seem to be a second red flag, but Royal Caribbean's markup has been well earned. It's historically the cruise line with stronger margins, heartier revenue growth, and customer reviews.
It's also not necessarily trading at a valuation premium despite its larger market cap and enterprise value. Both Carnival and Royal Caribbean are currently going for 16 times this fiscal year's projected earnings and 13 times next year's target. Royal Caribbean actually trades at a discounted valuation to Carnival if you go with enterprise value instead of market cap, given the larger player's more heady leverage. Yes, Carnival is the leader in revenue, but Royal Caribbean keeps generating substantially higher net income than the top dog -- and that is expected to continue for at least the next several years.
This doesn't have to be a competition. The rising tide is lifting all ships. Carnival is up 19% since posting blowout results a month ago. Royal Caribbean and Norwegian are up 13% and 17%, respectively, in response. If Royal Caribbean comes through with eye-opening results, that could also lift its two peers higher.
It's a good time to keep an eye on cruise line stocks in general and on Royal Caribbean in particular as the class act and top performer. With all three major players reporting record future bookings, widening margins, and lifting their outlooks a couple of times already in 2024, don't let the industry turnaround catch you by surprise.
