Royal Caribbean Earnings: Consumer Interest in Travel Offers Wind in the Sails Despite Macro Worries

We plan to raise our $86 fair value estimate for no-moat Royal Caribbean RCL 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.

In our opinion, recent progress in bookings and pricing has accelerated the company’s progress toward its Trifecta program goals that call for triple-digit EBITDA per available passenger cruise days, and double-digit EPS and teen ROICs by the end of 2025. Our forecast calls for double-digit EPS in 2026, but we don’t see ROICs getting back to a teen rate until late in the decade, waylaid by a heavy invested capital base; however, this timing could improve as debt repayments occur ahead of schedule. We think triple-digit capacity adjusted EBITDA could take a bit longer to achieve if the firm reinvests some profits into the customer experience, but note the launch of cost-efficient hardware could mitigate some pressure.