HenryTo
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Joined: 06 Aug 2004
Posts: 11742
Location: Los Angeles, California
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 Posted: Thu Feb 02, 2012 2:34 pm Post subject: Royal Caribbean (RCL) |
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Morningstar on RCL's 4Q earnings.
| Quote: | Royal Caribbean Delivers Decent 4Q, but Costa Tragedy Acts as Drag on 2012
Royal Caribbean RCL reported a fourth quarter that was largely in line with our and the consensus expectations. The company reported earnings per share of $2.77, the same as our forecast, driven by net yield increases of 3.2% but affected by net cruise cost growth of 6.3% (including fuel) on an as-reported basis. While we like the long-term prospects for the cruise industry and Royal Caribbean, the company could not escape the halo effect that Carnival's CCLCUK Costa Concordia tragedy has created over cruising. We did not lower our fair value estimate for Royal Caribbean when the incident occurred, but plan a decrease to bring our near-term free cash flow expectations in line with reality, considering the drag the media scrutiny has created for both Royal Caribbean and Carnival.
Masking a fourth quarter that would typically be perceived as solid is the forward forecast from the company that takes into account the depressed demand it has encountered since mid-January, when the Concordia was grounded. While the company noted that there were no material changes to cancellation activity, it conveyed that new booking activity had been affected, with North American booking volume down in the low to mid-teen percentages and European booking volume down even more significantly. On the bright side, it appears that the precipitous drop in bookings has stabilized, and management believes it can achieve yield improvement of zero to 4% on an as-reported basis for 2012.
On the cost side, distribution changes and deployment initiatives are likely to increase net cruise costs by about 300 basis points to 5%-6% in 2012 (the same changes are expect to help yields by 200 basis points during the year). Even though first-quarter earnings seem to be intact, we can see the longer-term implications for 2012 earnings and in particular summer bookings as indicated by the company's 2012 outlook for EPS of $1.90-$2.30. We expect both our $3.02 and the Street's $2.94 estimate for 2012 to be adjusted accordingly, and as we reduce our earnings estimate materially, our fair value will adjust as well.
We remain positive on the cruise industry as a whole over the longer term, as we expect the demand for cruising will handily outstrip the growth in capacity over the next five years at least. We deem it prudent to remain on the sidelines when the media has a stranglehold on an industry, particularly when we know it will take at least a few months to remove the Concordia ship from Mediterranean waters, and the spectacle will remain a sight for both cruisers and investors that will be difficult to digest over the near term. Once we trudge through what is likely to be a difficult quarter or two for both Royal Caribbean and Carnival, we think there will be a number of positive catalysts that will make these stocks compelling. |
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