Is Royal Caribbean A Buy On Increased Travel? (RCL)
Executive summary and Recent news
Royal Caribbean Cruises (NYSE:RCL) is one of the best known names in the cruise industry. The company operates Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Cruises, and CDF Croisieres de France. The company owns over 40 ships including ships in development and offers land vacations in Alaska, Asia, Australia, New Zealand, Canada, Europe, and South America as well. Based on some of my more recent articles in relation to travel-related companies, I decided to take a look at Royal Caribbean.
Catalysts
One piece of news that caught my interest about Royal Caribbean was the recent announcement of what will become the largest cruise ship ever built. The ship will be called Harmony of The Seas and will launch in 2016 with some features that are sure to attract both new and previous Royal Caribbean customers. The cruise ship is expected to be able to accommodate nearly 5,500 people and will feature larger staterooms, deck top water parks and more.
As I mentioned previously, another reason I decided to research Royal Caribbean is due to the research I have done in relation to the travel industry for 2015. As mentioned in my previous article on TripAdvisor (NASDAQ:TRIP), the travel season in 2015 is expected to be strong based on consumer surveys. Strong demand for travel and vacation could bode well for one of the largest names in cruises.
Royal Caribbean stock is also quite attractive from a valuation standpoint as well. The company currently trades at a price-to-earnings multiple of approximately 22, which is slightly higher than the SP average of about 18. However, when comparing Royal Caribbean’s P/E ratio to its growth rate, MorningStar shows a PEG ratio of only 0.6. In other words, Royal Caribbean is trading at a multiple nearly half its growth rate, typically a very bullish sign conceptually.
Downsides
As with any stock, investing in Royal Caribbean does not come without its risks. One of the more disappointing articles I read about Royal Caribbean recently could really discourage some investors. Royal Caribbean CEO Richard D. Fain sold nearly 90,000 shares of stock at the end of February. This is normally not a good sign for a company, although it should be noted that this sale may be for a number of different reasons, including reasons not related to the expected performance of Royal Caribbean. Fain does still own over $85 million worth of Royal Caribbean stock, so only a fraction of his holding was sold.
The long term past performance of the company may also be a concern for some investors. When looking at the past five years’ performance, the stock has actually outperformed the SP during this period of economic recovery. Over a more long-term horizon of 10 years however, the stock has underperformed the market and the leisure industry as a whole.
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Charts Courtesy of Morningstar
Additionally, with the cruise industry, there are always certain macroeconomic risks. The risk of declining economic growth, decreased consumer discretionary spending, and potential interest rate increases or financing difficulties to purchase new cruise ships could all damage the growth of Royal Caribbean.
Conclusion
Overall, Royal Caribbean could be a good potential play on the travel industry. I anticipate the travel industry to do fairly well over the next 3-5 years, which could positively impact Royal Caribbean and send the stock higher. Having said that, the stock does not come without some fairly significant risks. More conservative investors may decide to look elsewhere, while more risk-tolerant investors may consider Royal Caribbean.
This article is given for informational purposes only and is not to be construed as investment advice. Contact your investment professional and do your own due diligence before investing.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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