Company Reports

Consumer interest in travel has maintained momentum for Royal Caribbean into 2024, continuing the robust demand and pricing trends in the business. The redeployment of the fleet was completed in mid-2022 and occupancy has returned to historical levels aiding a normalization of profits and cash flow. Royal Caribbean reported record pricing in 2023 (13% above 2019's level), with further growth anticipated in 2024, given robust advance booking patterns and price levels thanks to a healthy consumer appetite for travel. On the cost side, expenses should be better managed ahead as a result of optimized occupancy and ongoing productivity initiatives, aiding profitability.

The appetite for cruise holidays hasn’t abated, driving profitability significantly higher at narrow-moat Royal Caribbean. At the start of the year, Royal forecast EPS of $9.50-$9.70 for 2024 but has since lifted its outlook twice. The firm is on track to generate $10.70-$10.90, well ahead of our $10.23 estimate before the earnings report and a high-water mark for the company—despite having more shares and more than double the debt-service cost compared with 2019. All potential contributors to higher profitability have helped, including solid close-in demand, strong onboard revenue, and favorable expense timing. Investors responded well to the lift in outlook and first-quarter outperformance, with shares up 2% in a down market. Even as we expect to raise our $125 fair value estimate by a high-single-digit rate, we view shares as fairly valued.

Consumer interest in travel has maintained momentum for Royal Caribbean into 2024, continuing the robust demand and pricing trends in the business. The redeployment of the fleet was completed in mid-2022 and occupancy has returned to historical levels aiding a normalization of profits and cash flow. Royal Caribbean reported record pricing in 2023 (13% above 2019's level), with further growth anticipated in 2024, given robust advance booking patterns and price levels thanks to a healthy consumer appetite for travel. On the cost side, expenses should be better managed ahead as a result of optimized occupancy and ongoing productivity initiatives, aiding profitability.

Narrow-moat Royal Caribbean continues to find upside in consumer demand, benefiting from the brand’s ability to capitalize on customer preferences. A mere three weeks ago, the firm offered its initial 2024 outlook, calling for EPS of $9.50-$9.70, a roughly 40% increase over 2023 results. On Feb. 21, Royal lifted its already-robust earnings per share forecast to $9.90-$10.10 for 2024. Notably, this is above prepandemic EPS and will represent a record result if achieved, despite more than $800 million in incremental interest expense and 70 million more diluted shares outstanding versus 2019.

Consumer interest in travel has maintained momentum for Royal Caribbean into 2024, continuing the robust demand and pricing trends at the business. The redeployment of the fleet was completed in mid-2022 and occupancy has returned to historical levels aiding a normalization of profits and cash flow. Royal Caribbean reported record pricing in 2023 (13% above 2019's level), with further growth anticipated in 2024, given robust advance booking patterns and price levels thanks to a healthy consumer appetite for travel. On the cost side, expenses should be better managed ahead as a result of optimized occupancy and ongoing productivity initiatives, aiding profitability.

Narrow-moat Royal Caribbean continues to show momentum in demand, as the launches of Icon of the Seas, Celebrity Ascent, and Silver Nova have created a halo around the brand. Appetite for Royal’s offerings have been unfettered despite consumer caution across numerous spending categories, leading Royal to capture five of the best booking weeks ever since the end of October. This has generated a record booked position in rate and volume, which has provided a whopping $5.3 billion in customer deposits (up from $4.2 billion last year). Although we suspect this helped the fourth quarter impress from a profitability perspective, it has already led to a 2024 outlook that is nothing short of spectacular. Indeed, the firm expects as reported yield growth of 5.3%-7.3% and net cruise cost growth of 2%-2.5%, both better than our 4.5% and 5% respective preprint estimates. This should lead to EPS of around $9.60, above our $9.16 prior estimate, more than 40% higher than 2023 and ahead of 2019’s level despite more than $800 million in higher projected debt service costs, with an EBITDA margin outpacing prepandemic marks.

With travel constraints and coronavirus hesitancy in the rearview mirror, consumer interest in travel has maintained momentum for Royal Caribbean, leading to robust demand and pricing (ahead of 2019 levels) at the business. The redeployment of the fleet was completed mid-2022, and booking patterns have surpassed historical levels. As such, Royal Caribbean should report record pricing in 2023, with further growth anticipated in 2024, given robust advance booking patterns. On the cost side, expenses should be better managed ahead, with occupancy set to return to historical levels for the entirety of 2024, aiding profitability.

We are reinstating our narrow moat ratings for Carnival, Royal Caribbean, and Norwegian after taking away the moat designation at the onset of the COVID-19 pandemic. We think the cruise firms capture an economic moat stemming from three sources, including efficient scale, brand intangible asset, and cost advantage. Underlying these sources are factors including barriers to entry, pricing power, and scale advantages that bolster the cruise lines competitive edge. We now forecast ROICs that are even better than the pre-COVID-19 period over our outlook, reaching 18% at Carnival, 17% at Royal, and 13% at Royal at the end of our 10-year forecast versus sub-10% in 2019 (when the firm last held a narrow moat rating) and our 10% weighted average cost of capital estimate.

With travel constraints and coronavirus hesitancy in the rearview mirror, consumer behavior around travel and social distancing have maintained momentum at Royal Caribbean, leading to robust demand and pricing (ahead of 2019 levels) at the business. The redeployment of the fleet was completed mid-2022, and booking patterns have surpassed historical levels. As such, Royal Caribbean should see record pricing in 2023, with only mininal remaining bookings paid for with future cruise credits and still-elevated onboard spending. On the cost side, the impact of inflation and fuel prices could reman disruptive over the near term but have been managable over the course of 2023 thanks to hedging strategies, aiding profitability.

Shares of no-moat Royal Caribbean edged higher on its third-quarter results and commentary, which conveyed a positive outlook on demand despite the uncertain macroeconomic and global geopolitical environments. Bookings and pricing for 2024 are still ahead of 2023 levels, which have outpaced prepandemic metrics. In fact, during the third quarter, net yields per diem of $272 were 17% higher than the same period in 2019, although costs remain higher than optimal, given the significant amount of inflation in recent years. With a continued extension of the booking window, we think Royal is in a unique position to use 2024’s wave season to lock in bookings further out than usual, capitalizing on the consumer’s still-robust appetite for travel. In response to demand strength, Royal lifted its full-year outlook for as-reported net yield growth to 12.4%-12.9% (from 11.5%-12%) and EPS to $6.58-$6.63 (from $6-$6.20, nearly double from the start of the year). As a result, we plan to raise our $100 fair value estimate by a mid-single-digit rate, rendering shares undervalued.

With travel constraints and coronavirus hesitancy in the rearview mirror, consumer behavior around travel and social distancing have returned to normal for Royal Caribbean, leading to robust demand and pricing (ahead of 2019 levels) at the business. The redeployment of the fleet was completed mid-2022, and booking patterns have returned to a historical pace. As such, Royal Caribbean should see record pricing in 2023, as the firm digests a few remaining bookings paid for with future cruise credits and takes new reservations. On the cost side, the impact of inflation and fuel prices could reman disruptive over the near term but should continue to moderate over the remainder of 2023, aiding profitability.

We plan to raise our $94 fair value estimate by a high-single-digit rate for no-moat Royal Caribbean after digesting stellar second-quarter results and a 2023 EPS outlook lifted by more than 30% (to $6.00-$6.20 from $4.40-$4.80). Given the print, it’s clear consumers are willing to spend on travel despite inflation, as booking volumes in the second quarter were significantly higher (unquantified by Royal) at record pricing levels versus 2019. Moreover, 2024 bookings and pricing indicate continued momentum, displayed by Royal’s whopping $5.7 billion in advance customer deposits (this was $4.2 billion at year-end). Second-quarter net revenue yields (pricing) rose at a blistering 12.6% versus 2019 thanks to healthy close-in demand and robust onboard spending, which rose around 40% over the 2019 and 2022 periods. While costs are still inflated, they will decelerate through the back half of the year, returning the EBITDA margin to 2019 levels.

With travel constraints and coronavirus hesitancy largely in the rearview mirror, consumer behavior around travel and social distancing have returned to normal for Royal Caribbean, leading to positive operating cash flow and EBITDA at the business. The redeployment of the fleet was completed mid-2022, and booking patterns have returned to a historical pace. As such, Royal Caribbean should see record pricing in 2023, as the firm digests a few remaining bookings paid for with future cruise credits and takes new reservations. On the cost side, the impact of inflation and fuel prices could reman disruptive over the near term but should continue to moderate in 2023, aiding profitability.

We plan to raise our $86 fair value estimate for no-moat Royal Caribbean by a high-single-digit rate due to better- than-expected first-quarter results and an elevated outlook for 2023. The first quarter delivered sales of $2.9 billion, in line with our outlook, and an adjusted EPS loss of just $0.23, which was a whopping $0.45 better than our forecast. The outperformance was attributed to better close-in bookings, higher prices, strong onboard spending, and solid expense management. Record bookings, which arose from a successful wave season, now position Royal for pricing at a high-single-digit rate above 2019 levels in 2023, by our math. Because of demand trends, Royal lifted the midpoint of its 2023 EPS guidance by $1.30, to $4.40-$4.80, placing the firm on track to deliver 2023 EBITDA that is nearly 10% above 2019's level. All signs point to resilient interest in the travel experience, with spending on services over goods remaining persistent, which supports Royal's lift of its 2023 as-reported pricing growth outlook to 6.25%-7.25%, from 2.5%-5.5%. With $5.3 billion in advance ticket sales, up an impressive 26% sequentially (in line with no-moat Norwegian's customer deposit growth in the period), evidence exists that cruise demand is holding up.

With travel constraints and coronavirus hesitancy receding globally, consumer behavior around travel and social distancing have returned to normal for Royal Caribbean, leading to positive operating cash flow and EBITDA at the business. The redeployment of the fleet is complete, and cruise operators have successfully implemented health protocols to ensure the safety of the cruising population. With virus restrictions largely in the rearview mirror, Royal Caribbean should see modest pricing gains as it digests a few remaining bookings paid for with future cruise credits (in 2023) and takes new reservations. On the cost side, some health protocols and cruise resumption costs could reman high in the near term but should continue to pare back in 2023, aiding profitability.

We plan to raise our $80 fair value estimate for no-moat Royal Caribbean by a mid-single-digit rate after fourth-quarter results and adjusting our 2023 outlook. Even after a mid-single-digit post-print pop in shares, we view shares as undervalued. Fourth-quarter sales of $2.6 billion were in line with our forecast, and the adjusted EPS loss of $1.12 bested our $1.30 forecast due to well-managed expenses. Operations are nearly back to normal, with Royal posting 95% occupancy and revenue above the fourth-quarter 2019 level, marking the first time for a quarter with sales above prepandemic levels. The key driver in our intrinsic value lift stems from the commentary around positive forward demand, with seven of the largest booking weeks ever occurring since November. Royal is in a strong position, with a cumulative booked position within past ranges at higher prices for 2023 along with more than $4 billion in advance ticket sales.

Travel constraints and coronavirus hesitancy are receding, so consumer behavior about travel and social distancing are returning to normal for Royal Caribbean, leading to positive operating cash flow and EBITDA at the business. The redeployment of the fleet is complete, and cruise operators have successfully implemented health protocols to ensure the safety of the cruising population (as evidenced by a lower positivity rate than on land). With virus restrictions largely in the rearview mirror, Royal Caribbean should see modest pricing gains as it digests a few remaining bookings paid for with future cruise credits (into 2023) and takes new reservations. On the cost side, some health protocols and cruise resumption costs could reman high in the near term but should continue to pare back in 2023, aiding profitability.

No-moat Royal Caribbean posted its first profitable quarter since the start of the pandemic, generating third-quarter revenue of $3 billion and adjusted EPS of $0.26. While sales were close to the $3.2 billion generated in the third quarter of 2019, profitability remains at a fraction of previous levels, given elevated levels of debt service and dislocated expenses from the restart. Third-quarter momentum was offset by a weak outlook for the seasonally small fourth quarter, as Royal expects just $2.6 billion in sales and a $1.30-$1.50 EPS loss, below our $2.9 billion and $0.11 loss projections, respectively. This is still a marked improvement over 2021’s fourth quarter, when Royal delivered less than $1 billion in revenue and a nearly $5 adjusted EPS loss. Sentiment remains promising, as 2023 bookings doubled during the third quarter sequentially and remain above prepandemic levels. Cruise appetite was also evidenced by $3.8 billion in customer deposits, $400 million above the third quarter of 2019.

Despite enduring travel demand into the fall of 2022 and our view that it can continue into 2023, investor concerns around future trips and credit availability have grounded share price performance across the industry. As a result, we see meaningful opportunities to book investment stays in Sabre, Accor, Booking Holdings, and Norwegian, which trade at 64%, 42%, 44%, and 54% discounts to our $15, EUR 37.50, $2,900, and $28 fair value estimates, respectively.

Travel constraints and coronavirus hesitancy are receding, so consumer behavior about travel and social distancing have returned to normal for Royal Caribbean, leading to positive operating cash flow and EBITDA at the business. The redeployment of the fleet is complete, and cruise operators have successfully implemented health protocols to ensure the safety of the cruising population (as evidenced by a lower positivity rate than on land). With virus restrictions largely in the rearview mirror, Royal Caribbean should see modest pricing gains as it digests bookings paid for with future cruise credits and takes new reservations. On the cost side, some health protocols and cruise resumption costs could reman high in near-term spending, but should pare back in 2023, aiding profitability.