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Royal Caribbean Cruises Ltd. (RCL) is a cruise company based in Norway, based in Miami, FL. After Carnival Corporation & plc. (CCL / CUK) Royal Caribbean is the second largest cruise operator in the world.
The company's business model is based on convincing the consumer that cruises are a better option for vacations than traditional tourist destinations. The company has been running on this added value and is making cruises a popular holiday choice among families, couples and single travelers.
Based on the indications provided by the company for the second half of 2018, the share price has room to be directed towards 2019. Royal Caribbean is the best buy in the cruise industry and I earn a fair value for the stock of $ 139, which is based on a multiple of 14 times 2019 earnings. I predict a growth rate of younger earnings and a high growth rate of single-digit sales up to 2019, as the company captures strong consumer spending trends .
Overview of business activities
Royal Caribbean has three subsidiaries: Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises. The company also holds 50% of TUI Cruises, 49% of Pullmantur and 36% of SkySea. Royal manages 49 ships with a total of 124,070 berths. The destinations are about 540 ports on 7 continents.
Royal Caribbean International, Celebrity Cruises and Azamara Club are part of the company's Global Brands segment. The three brands are part of the company strategy to improve their flexibility in offering holiday packages.
- Royal Caribbean International: It has a fleet of 24 ships traveling to popular destinations around the world such as Alaska, Asia, Australia, Bahamas, Bermuda, Canada, the Caribbean, Europe and New Zealand. Currently, they have 6 ships under construction that will add a capacity of 30,500 berths to the fleet. The first ship in the new fleet will enter service in the second quarter of 2019.
- Celebrity Cruises: are the premium cruise fleet of Royal Caribbean Cruises Ltd. This segment of the company is responsible for offering luxury cruises and exotic destinations for customers with greater economic capacity. It has a fleet of 12 ships with a capacity of 23,170 moorings. The brand is awaiting the completion of 5 additional vessels that will add a capacity of 11,700 cabins. The first will come into operation in the last quarter of 2018.
- Azamara Club Cruises: Azamara is responsible for offering smaller but more luxurious cruises in North America, the United Kingdom and Australia. This segment offers a much more personalized service and only has 2 boats with a capacity of 1,400 beds.
Royal in the sector
2018 was a record year for the cruise industry, which grew in the high single figures ~ 7 – 10% per year. Royal Caribbean has captured this growth and is attracting new customers. These new customers are also known as "first cruisers" and are critical to the success of the industry. The new cruisers are concentrated mainly in North America. For 2017, it represented 50% of cruise customers in the world.
For Royal Caribbean, North America accounts for 59% of all passengers and is strategically important for their operations. The company has also developed an effective customer engagement strategy all over the world. International customers accounted for 42% of the company's revenues in 2017.
The company has been at the cutting edge of the cruise market by making investments towards the WiFi ship. With consumers requiring constant connectivity, the company has increased their offerings in high-speed Wi-Fi and has updated its digital content making it accessible to any platform. It has also improved the Internet capacity installed on ships by increasing bandwidth for cruisers. The company monetizes Wi-Fi by offering daily internet packages ranging from $ 16 to $ 30 a day. The Internet is expensive because the ship needs to use satellites to acquire the signal and there is a bit of latency that slows the Internet browsing experience. This service is fundamental to the way in which the consumer evaluates the overall cruise experience and is at the forefront of the company's capital spending plans.
The company's revenue model is largely based on ticket sales and 72% of last year's revenue came from the ticket. Most cruise packages are available for sale up to a year before the cruise departs. The rest of the company's revenue is concentrated in onboard activities with 28% of the total.
Among the activities, there are sales of drinks and spirits, communication and internet services, gift shop, photography, spa and extra boarding services.
Within the cruise industry, Royal has the best stock market performance. Comparing Royal Caribbean (RCL) with Carnival (CCL) and Norwegian Cruise (NCLH), the company has better profit margins despite being not the biggest of the three. The company is characterized by its aggressive growth and sustained operational success of its business.
Is it the best purchase?
Royal's main competitor is Carnival Corp. (CCL) and I think Royal Caribbean Cruises is a better purchase and the reasons are:
It has the highest net income margin of 19.5%. Neither Carnival nor Norwegian manage to reach the levels that Royal reaches every year with net margins of 17.2% and 14.5% respectively.
The recognition of the brand is renowned all over the world. It is a brand that boasts a great recognition for the cost-benefit ratio of its packages and quality of service.
The shift towards the environment increases brand awareness and the company is improving its safety on board for passengers and employees.
Fleet expansion is of paramount importance and new ships will add a capacity of about 43,000 moorings by the end of 2024.
The company employs the industry's leading strategy to engage in the market segment of the first cruisers. This strategy allows for a high level of customer loyalty, which usually, after having traveled for the first time with Royal, does it again on the following trips.
Financial efficiency and successful investment strategies to reward shareholders with repurchases and dividends. The annual return of the company is around 2.44%, which shows the management's awareness of returning the capital to the shareholders.
Royal has the best business relationship with travel agencies all over the world and take advantage of this relationship to increase sales growth rates in single high figures every year.
(Source: SEC EDGAR Archings, 10-K)
I earn a fair value for the stock of $ 139, which is based on a multiple of gains of 14 times 2019. When we look at the historical valuation multiples in the sector, the current valuation levels are the lowest in the last 5 years . Two reasons why the sector is negotiating a discount are the risk mood in the market and the increase in earnings per share which lowers the price-to-earnings ratio. It is a company that has always managed to maintain high levels of growth and efficient use of equity capital. ROIC grew by 18% in the last year and Adjusted EPS grew by 24%. The high levels of return associated with increased profitability are a sign of operational excellence to add value to its shareholders. The company also increases the total return of shareholders through a $ 500 million share repurchase program and an annual dividend of $ 2.80.
A major operational risk is fuel prices and exchange rate fluctuations. Royal Caribbean has implemented a currency and fuel coverage policy to reduce this risk. The company has been effective in reducing fuel costs in the last 3 years from 10% in 2015 to 6.5% in 2018 due to effective hedging strategies. It was effective in reducing the impact of interest rates and volatility on oil prices. The total of the derivative instruments used by the company in the last year was $ 320 million. The instrument most used by the company consists of foreign currency forward contracts, which represent almost $ 160 million dollars.
The company is sometimes influenced by uncontrollable natural events, such as hurricanes or typhoons. In 2017, the negative impact of these disasters was $ 0.26 per share. However, it managed to reduce expenses by $ 119 million and increase revenues by $ 281.4 million with the intent to mitigate the impact of unforeseen natural events.
In the last quarter the company's cost of goods accounted for $ 1.4 billion on total revenue of $ 2.04 billion. Most of Royal's expenses are concentrated in transport and commissions with 15.5% of total passenger ticket revenues, but marketing and advertising also represent a significant amount of expenses with 13.5%.
The company is expected to close this year with a corrected EPS between $ 8.90 and $ 9.00, which represents a significant increase compared to 2017 levels. There are good expectations for Royal Caribbean due to the expansion of the their fleet with new ships and a strong management team to employ a successful business strategy.
Management is promoting efforts to save fuel and the environment
The managing director of the last quarter conference call mentioned the management efforts to reduce the negative impact on the environment of the cruise, in particular with the advanced "AEP" emissions purification systems, implemented on 19 of their ships. It is a high investment that pays for less fuel costs and less environmental impact.
Richard D. Fain, the CEO of Royal and the entire board have been very proactive in managing the company. The council was a pioneer in new environmental trends, conservation of the environment and reduction of fossil fuel consumption. He also managed to overcome the adverse winds faced by the company due to the recent impact of the hurricane season. The international image of the company has improved thanks to the good performance of the board of directors and investors are increasingly positive about their brand.
The managing director of the last quarter conference call affirmed the importance of aligning the company with the conservation efforts and illustrates the company's commitment to reduce the number of employees. environmental impact of its fleet.
Richard D. Fain, CEO
I should not abandon this topic of fuel without mentioning our energy saving efforts because we are enormously proud of the work done by our teams and continue to do to find ways to reduce our energy consumption. We already have the lowest levels in our industry and we have partnered with the World Wildlife Fund to further improve it. While AEP systems and other similar measures are good, the best way to reduce our environmental impact is to use less energy first.
We will continue to work to reduce the use of energy and reduce emissions to generate our remaining energy needs.
Revelation: I / we have no positions in any of the above mentioned titles, and we do not plan to start any positions within the next 72 hours.
I wrote this article alone, and expresses my opinions. I'm not getting any compensation for this (other than Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.