A global economic slowdown and terrorism concerns have begun to crimp the travel market. Several travel-related companies posted disappointing results last week, and some might see prolonged weakness.
Royal Caribbean Cruises (RCL) was one of the big losers early in the week; its stock fell 6.2% on Tuesday after the company reduced its 2016 earnings-per-share guidance to a range of $6 to $6.10, a 20-cent decrease from its prior projection. Royal Caribbean blamed the decline on currency and fuel costs, but the Street is worried that the supply of cruise tours is outpacing demand.
That has been a theme all year. An uncertain economic outlook, made more so by the United Kingdom’s vote to leave the European Union and weakness in the Chinese economy, has hurt the cruise market. Royal Caribbean, the second-largest operator after Carnival(CCL), has fallen 27% this year. But the anxiety appears overblown, and investors who have ridden out past scares about the cruise market typically were rewarded.
Royal Caribbean’s core earnings remain solid, and CEO Richard Fain is confident the company will achieve its goal of hitting a “double-double”—doubling its 2014 EPS by 2017 and posting a double-digit return on invested capital. The company earned $3.39 a share in 2014; it needs to earn $6.78 next year to meet the goal. Analysts expect Royal Caribbean to earn $7.05 in 2017.
The stock, which rebounded later in the week to $74, is trading for just 10.5 times 2017 earnings estimates. At a still-modest multiple of 12 times, it could rise to $83, writes Nomura analyst Harry Curtis. But even that seems low for a stock that is projected by analysts to grow earnings at 20% a year in the longer term. At 14 times, the shares could cruise to $98.
During the earnings call Tuesday, Fain said Royal Caribbean is “solidly on our path toward the double-double.” Then, on Wednesday, he put his money where his mouth is, buying 29,190 shares on the open market for $2 million.
Fain has historically been a “reasonably good timing indicator,” wrote Wells Fargo Securities analyst Timothy Conder, noting that the buy “reaffirms our belief that the industry and the company’s long-term fundamentals remain intact, despite short-term head winds.”
Worries about Chinese demand are at the forefront. The company acknowledged demand is somewhat weak in Shanghai, which accounts for the bulk of China’s cruise market. The apparent slowdown comes at an inopportune time, because cruise operators had been expanding aggressively in China, with capacity growing at greater than 100% in Shanghai this year.
Still, any falloff could have a relatively small effect on Royal Caribbean. Chinese demand had been growing at a blistering 80% annual pace for several years, so any decline would be relative. China accounts for only 9% of Royal Caribbean’s business.
Trips to the Caribbean, Alaska, and Bermuda account for about half of the company’s capacity, and those routes have been growing strongly. North American booking numbers for 2017 are currently outpacing this year’s numbers. Investors looking to book profits in a still-growing travel niche might want to board now.
By: Avi Salzman (Barrons).
Photo: The Street.
Review: Emerging Market Formulations & Research Unit, FLAGSHIP RECORDS.
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