Royal Caribbean Group is Monday's IBD Stock Of The Day as the cruise line charts a first-class profit recovery, helped by China's reopening. RCL stock rose past an early entry point in today's stock market action.
Royal Caribbean stock surged on its Feb. 7 Q4 earnings report and 2023 guidance. The Miami-based company said earnings should range from $3 to $3.60 per share in 2023 vs. a $7.50 loss in 2022. That would still leave EPS well below 2019's record of $9.54.
However, Royal Caribbean expects a record year for earnings before interest, taxes, depreciation and amortization. Interest payments soared post-Covid as the company loaded up on debt to survive a crash in demand.
Operationally, RCL is now riding high again. With three new ships set for delivery this year, capacity will reach 14% above pre-Covid levels. Load factor recovered to 95% in Q4 vs. below 60% a year earlier, with 100% meaning two passengers per cabin.
The early-booking period, known as the wave season, for 2023 "has exceeded all expectations, even when considering our capacity growth," CEO Jason Liberty said on the Feb. 7 earnings call. He noted that the seven biggest booking weeks in company history all occurred since the Q3 earnings report in early November.
Royal Caribbean's Tight Ship
"RCL is operating at an extremely high level right now, in terms of controlling costs while striking an optimal balance of pricing and volume growth," Deutsche Bank analyst Chris Woronka wrote after the Q4 report.
He added that the cruise industry is "a year behind comparable sub-sectors such as hotels and theme parks on revenue recovery due to the considerably longer restart period."
Still, Woronka kept a hold rating on RCL stock, while bumping up his price target to 65. He sees potential headwinds on the horizon that could challenge bulls' predictions of a fuller profit recovery in 2024.
RCL's Boost From China
In a Feb. 21 note, Wells Fargo analyst Daniel Politzer wrote that China's reopening could be worth $6 (of EBITDA) per share for RCL and a more modest $1 per share for Carnival Corp. based on their 2019 capacity. He noted that China accounted for 6% of Royal Caribbean's capacity pre-Covid.
On the Q4 call, the company said it expects China's technical cruise industry ban should end in the first half of the year, as should Japan's testing and potential quarantine of Chinese tourists.
In Q1, about 80% of RCL's capacity will operate from North America, mostly sailing to the Caribbean. Australia accounts for 10% of capacity and Asia 5%.
In addition, RCL expects nearly 80% of guests to come from North America. If there are headwinds on the horizon, they would probably come from a consumer retrenchment in the U.S.
Royal Caribbean Stock
RCL stock rose 2.8% to 72.14 on Monday. The move broke a downtrend that followed RCL stock's post-earnings rally. Last week, RCL found support at its 21-day average.
A broader look shows the recent action is a handle at the end of a consolidation that began last April. Aggressive investors could use the rebound from support and break of a handle's down-sloping trendline as an early entry point.
Royal Caribbean stock's relative strength line, the blue line in IBD charts that tracks its progress vs. the S&P 500, is right near its highest point since last April.
Travel-related stocks have come to the fore, especially with the reopening of China and Europe's dodging of recession. RCL is part of the flagship IBD 50 list of leading stocks.
