Royal Caribbean Remains at Neutral

We reiterate our Neutral rating on Miami based Royal Caribbean Cruises Ltd (RCL), the second largest company in the cruise vacation industry.

Second Quarter Performance

Royal Caribbean Cruises reported second quarter 2010 non-recurring earnings of 28 cents per share, which was well ahead of Zacks Consensus Estimate of 19 cents and the year-earlier quarter’s loss of 22 cents.

Total revenue in the quarter jumped 23.1% year over year to $1.60 billion, almost in line with the Zacks Consensus Estimate of $1.61 billion. The year-over-year increase in revenue was driven by a rise in ship capacity combined with net yield improvements.
Total cruise operating expenses increased 12.5% year over year to $1.1 billion in the second quarter. Net cruise costs per passenger including fuel dipped 2.8% year over year despite the sharp rise in oil prices in the quarter.

Outlook

For the third quarter, Royal Caribbean expects earnings per share to range between $1.52 and $1.57. For full-year 2010, management raised its earnings per share outlook to the range of $2.25 to $2.35 from $2.15 to $2.25.

Neutral Recommendation

The company exhibited considerable gain in net yields in the recently reported quarter, despite the adverse impact from the strengthening of the U.S. dollar led by concerns over European sovereign debt. The yield improvement came on the back of rises in both net ticket yield as well as occupancy rate. We believe this signifies the positive turnaround in the industry. Additionally, effective cost-control initiatives taken by Royal Caribbean also helped to successfully encounter the steep rise in fuel costs. Royal Caribbean also took a number of measures to keep its fuel consumption under control.

However, management was compelled to lower its full-year yield guidance owing to currency fluctuations. Any drastic hike in fuel price or cannibalization of existing fleet by newer ones also could be threats to the company’s earnings.

Hence, we have a Zacks Rank #3 (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.

ROYAL CARIBBEAN (RCL): Free Stock Analysis Report

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