Royal Caribbean returns to profitability. Is it time to buy?

Royal Caribbean Cruises (NYSE:RCL) returned to profitability in the third quarter for the first time since the pandemic, but after forecasting that its fourth quarter will likely post a much bigger loss than expected, the cruise ship operator is seeing its stock sink.

The results show, however, that there remains significant pent-up demand for travel. The second-largest cruise line, whose shares remain 55% below where they traded before the COVID-19 outbreak, remains on track to return to profitability. Does that make it a good investment today? Let’s see.

Image source: Getty Images.

Back to the high seas of profitability

On an adjusted basis, Royal Caribbean reported third-quarter earnings of $0.26 per share, completely erasing the $1.4 billion loss, or $5.59 per share last year, and much better than analysts expected $0.20 per share. Revenue of $2.99 ​​billion was six and a half times higher than a year ago and matched Wall Street projections.

Royal Caribbean said the performance was due to a combination of “higher load factors due to strong close-in demand, further improvement in onboard revenue and better cost performance.”

Load factors, or occupancy rates, rose to 96% overall, and its trips to the Caribbean – Royal Caribbean’s largest market – actually reached 105% during the period as booking rates were accelerating. (Occupancy rates above 100% mean three or more people stayed in a cabin.)

This means that passengers are making their cruise reservations much closer to their departure dates than they generally did before the pandemic. There were about 50% more bookings in the third quarter compared to the same period before the COVID-19 outbreak.

This bodes well for the future as next year Royal Caribbean will see bookings well within the historic ranges it experienced before the pandemic, but at much higher prices. He therefore does the same business, but generates more income. Unfortunately, its costs are also higher, and this is what leads it to forecast a return to losses in the fourth quarter.

Unfavorable exchange rates, higher fuel expenses and higher interest rates lead the cruise ship operator to expect adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of 350 million to $400 million and an adjusted loss of $1.30 per share to $1.50 per share on revenue of $2.6 billion.

The fourth quarter will be a rogue wave

Next year in particular is looking for the cruise line. Just before the pandemic, passengers were booking trips for 2020 at a blistering pace, the highest in the company’s history. As we have all seen, however, the industry has been crushed by no-sail orders that have stretched far beyond virtually every other business allowed to reopen.

Well, now that the cruise industry is once again plying the waters, the demand for travel and tourism is booming. Royal Caribbean said its booking volumes for 2023 doubled in the third quarter from the second quarter and were significantly higher than in 2019.

President and CEO Jason Liberty said, “Our brands, vacation offerings and fleet have never been stronger and we are well positioned to continue to dramatically change our financial performance. deliver a superior return to shareholders. »

Focus on growth

Royal Caribbean is gearing up for this new era of cruising with a number of massive new ships in its fleet. It has added nine new ships since 2019, giving it 64 ships across its various brands, and has 10 more ships on order.

The cruise line is also launching what it calls the Trifecta program, a three-year initiative designed to increase adjusted EBITDA per available cruise day to triple digits, increase adjusted earnings per share (EPS) to double digits and achieve return on invested capital. (ROIC) in adolescents.

Liberty said: “We expect the formula of moderate yield growth, strong cost discipline and moderate fleet growth to provide a strong financial profile.”

As a result, earnings might not be as high as investors were used to before the pandemic, but it could have Royal Caribbean on a financially balanced keel, which would leave the cruise ship fit for the future.

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Rich Duprey has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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