Royal Caribbean Q3 Earnings Beat, Down on Below Par View - Analyst Blog

Royal Caribbean Cruises Ltd. (RCL) posted third quarter 2014 results with earnings beating the Zacks Consensus Estimate but revenues missing the same. Shares of the cruise operator declined 1.8% on Oct 23, as the company came out with fourth quarter and full year 2014 outlook that fell short of what the market expected. Also, the company provided an update on the booking trends for 2015 and a preliminary outlook of 2015 that was in line with market expectations.

Adjusted earnings of $2.20 per share beat the Zacks Consensus Estimate by a penny and were up 29% year over year. The upside reflects year over year improvement in revenues and decline in Other expenses. Earnings matched management's expectation.

Total revenue in the quarter increased 3.3% year over year to $2.39 billion due to higher passenger ticket revenues as well as increased onboard spending. However, revenues marginally missed the Zacks Consensus Estimate of $2.40 billion.

Quarter Highlights

On a constant currency basis, net yields increased 4.2% year over year. This was marginally higher than the company's guidance of a 4% increase. The upside reflects 4.4% increase in onboard revenue yields owing to increased load factors coupled with strong beverage programs. Europe, Asia and Alaska itineraries delivered double-digit yield improvement. However, Caribbean yields were down year over year.

Passenger ticket revenues were up approximately 7% year over year to $1.79 billion. Onboard and other revenues increased 6% year over year to $602.0 million, reflecting onboard revenue management initiatives.

Net cruise costs (NCC), excluding fuel, decreased 1.2% on a constant currency basis, better than management's expectation of flat to an increase of 1%.

Total cruise operating expenses increased approximately 0.7% year over year to $1.43 billion mainly due to a rise in onboard and other expenses, increased commissions, transportation and other costs, increased fuel costs and a rise in food expenses.

Fourth Quarter 2014 Guidance

The company expects adjusted earnings per share in the range of 35 cents to 40 cents per share in the fourth quarter, significantly up year over year. However, the Zacks Consensus Estimate stands higher at 44 cents. We believe strengthening of the U.S. dollar has negatively impacted earnings expectations. Moreover, the price of fuel in world markets has declined and the company will not benefit much from hedging. Also, net cruise costs excluding fuel declined during the reported quarter and the savings are expected to be spent during the rest of 2014.

Constant-currency net yields are expected to be up approximately 3.5% and net cruise costs excluding fuel are expected to be up in the range of 2% to 3%.

2014 Guidance

In-line with the mid-point of the prior guidance, the company expects earnings per share of $3.45, up 44% year over year. However, it was below than the Zacks Consensus Estimate of $3.51 per share.

Also, the company expects constant-currency net yields (In-line with the mid-point of the prior guidance) to increase approximately 2.5%. The company re-affirmed its NCC excluding fuel guidance on a constant currency basis and expects it to be flat to slightly down in full year 2014.

Robust Booking Trends for 2015 to Drive Earnings

Given the strong early bookings for 2015, the company expects the trend to continue. Moreover, booked load factors and APDs are higher compared to the year-ago period. Despite pressure in Caribbean sailings, the company is experiencing strong booking trends in North America and Europe. The company indicated that double-digit yield improvements in Europe and China sailings continue to offset the effects of a highly promotional Caribbean environment.

The company is optimistic in view of the recent trends and expects 2015 to be the sixth consecutive year of yield growth. Given the strong visibility, it expects earnings per share of $4.55 for 2015, up 30% year over year. The projected figure is in line with the Zacks Consensus Estimate.

Our Take

Strong booking trends are indicative of strong growth going forward. However, their impact is expected to be tempered by higher cruise costs. Moreover, the impact of Ebola cannot be ignored with Royal Caribbean being one of the largest players in the travel industry. (Read: Carnival, Royal Caribbean Cruises in Focus on Ebola Fears)

Royal Caribbean currently sports a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Norwegian Cruise Line Holdings Ltd. (NCLH), Vail Resorts Inc. (MTN) and Carmike Cinemas Inc. (CKEC). While Norwegian Cruise Line and Vail Resorts sport a Zacks Rank #1 (Strong Buy), Carmike Cinemas carries a Zacks Rank #2 (Buy).