Royal Caribbean Earnings: Demand Set to Sail Into 2024 as Bookings Remain Coveted by Consumers

Shares of no-moat Royal Caribbean RCL 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.

Impressively, Royal continues to elevate its trajectory toward its Trifecta initiative goals. The firm is seeking to achieve triple-digit capacity-adjusted EBITDA, double-digit EPS, and midteens ROICs by 2025, metrics we believe are becoming more achievable. Indeed, Royal put an EPS baseline of $9 in 2024, well ahead of the $8.30 FactSet consensus and $8.74 we had forecast before earnings. Indeed, this should easily allow Royal to reach its EBITDA and EPS goals in 2025 and ROIC target around a year later given the extremely high invested capital base. That said, such return levels would still be structurally higher than the high-single-digit ROICs Royal captured before the pandemic, displaying the strides in pricing power and cost control the firm has been able to capture since the return to sail.