Royal Caribbean Earnings: Appetite for Travel Remains Robust, Leading to Impressive Profitability

We plan to raise our $94 fair value estimate by a high-single-digit rate for no-moat Royal Caribbean RCL 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.

Royal still has a rich opportunity set—aside from brand new hardware set for launch with Icon of the Seas in January 2024, Royal should benefit from the reentry into the China market, the opening of the Royal Beach Club, and a price mix benefit stemming from the addition of two Silversea ships in 2023-24. Such efforts should help elevate the brand, attracting new consumers to Royal while stirring up repeat business. Coming with these opportunities are costs, which could limit further EBITDA expansion. Marketing fees to raise visibility on Icon, startup costs for China, and construction expenses for the Beach Club will be incurred. Given the methodical formula Royal has taken to growth in the past (modest price growth, controlling costs, moderate capacity increases) we see no reason to alter our long-term outlook that includes low-single-digit price and cost increases. With this outlook we think the double-digit EPS in Royal’s Trifecta plan should be achievable and capacity-adjusted EBITDA is likely to be approaching $100 by 2025.