Royal Caribbean stock is beating Carnival and Norwegian: is it a buy?

The Royal Caribbean Cruises (RCL) stock price is firing on all cylinders and outperforming its closest rivals like Carnival and Norwegian. It has risen in the last three consecutive months, and is sitting at a record high of $193.

After tumbling to a low of $19.12 in 2020, the stock has pared back those losses, and soared by 920%, giving it a market cap of $50 billion.

RCL has become bigger than Carnival ($23 billion), Norwegian ($10 billion), and Viking Cruises ($16 billion), combined. 

This is even though its revenue figures are significantly lower than Carnival’s. RCL’s annual revenue in the trailing twelve months stood at $15 billion compared to Carnival’s $24 billion. Its profit of $2.5 billion was higher than Carnival’s $1.5 billion. 

Royal Caribbean is doing well

Royal Caribbean is a leading cruise line company that operates three key brands: Royal Caribbean International, Celebrity Cruises, and Silversea Cruises. These brands have 26, 16, and 11 ships, respectively.

The company has also created a partnership with TUI, the biggest holiday company globally. For example, it has a 50% joint venture with TUIC, which operates German brands TUI Cruises and Hapag-Lloyd

Like other companies in the cruise industry, Royal Caribbean was affected significantly by the last Covid-19 pandemic as its business shut. 

Unlike the aviation industry which received bailouts, cruise lines received little support, and had to rely on debt and equity. RCL’s long-term debt jumped from $8.2 billion in 2019 to over $17.9 billion in 2020.

It also diluted its investors by selling new shares, which pushed its common outstanding shares from 208 million in 2019 to over 256 million today. The company also slashed costs by furloughing workers.

Royal Caribbean’s annual revenue dropped from over $10.9 billion in 2019 to $2.2 billion in 2020. Most of its revenue in 2020 came in the first quarter before governments imposed travel restrictions. Its 2021 revenue tumbled to $1.5 billion. 

Since then, the company has been in a strong recovery as the cruise industry has bounced back. Its annual revenue rose to $8.8 billion in 2022 followed by $13.9 billion last year, and analysts expect that the trend will continue.

According to Yahoo Finance, its 2024 will be $16.5 billion followed by $17.9 billion next year. It will then get to $20 billion in either 2026 or 2027. 

RCL’s business is booming

The most recent financial results showed that its revenue continued doing well as it reached its financial targets 18 months earlier than expected. Some of these targets are its triple-digit EBITDA per average passenger cruise days (APCD), return on invested capital (ROIC) in its teens, and a double-digit EPS. 

The numbers revealed that its load factor surged to 108% while its net income jumped to over $854 million. 

The company is benefiting from the renewed demand for cruising, which has seen forward bookings surge. Unlike in the past when cruising was a reserve for the elderly, many young people have embraced the trend. 

For RCL, higher demand means that it has room to boost prices. It also implies that the company has substantial customer deposits on hand. It ended the last quarter with $6.2 billion in customer deposits, which it can use to generate returns.

Valuation concerns remain

Royal Caribbean is doing well, and therefore, requires a premium valuation. As mentioned above, a key concern is whether the company is severely overvalued or whether the other brands are cheaper. 

RCL has a forward P/E ratio of 16.5, which is lower than the S&P 500 multiple of 21 and the consumer discretionary median of 18. 

It also has a forward EV-to-EBITDA multiple of 12, higher than the industry median of 10. These numbers mean that the company is trading at a premium, especially considering its substantial debt load of over $20 billion. 

To some extent, this premium valuation can be justified by its growth metrics. It has a trailing revenue growth of 27.7% and a forward metric of 26. Its forward EBITDA growth is 108%, which is impressive. The next key catalyst to watch will be its earnings, which are set to happen on October 29. 

Read more: Carnival stock sits at a key price: comeback could be epic

Royal Caribbean stock price analysis

The weekly chart shows that the RCL share price has been in a spectacular bull run in the past few years, as I predicted. It recently flipped the important resistance point at $133.80, its highest point in 2020.

The stock formed a golden cross pattern as the 50-week and 200-week moving averages crossed each other. 

Meanwhile, the Relative Strength Index (RSI) has moved to 71, meaning that it is not extremely overbought. The Chaikin oscillator has remained above the zero line.

Therefore, the stock will likely continue soaring ahead of its earnings release. However, a short-term pullback cannot be ruled out before then. 

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