Stock Analysis & Ideas

Royal Caribbean Lays Keel for New Ship

Sometimes you just have to throw caution to the wind, as cruise line Royal Caribbean (RCL) did recently. Despite two years of disaster punctuated by brief bursts of hope, Royal Caribbean offered up some fairly exciting news for cruise fans.

I’m actually somewhat bullish on Royal Caribbean. If the “recovery narrative” is going to hit anywhere, it’s likely going to start with cruise line stocks. The rest of the market suggests there’s hope for this product line as well.

The last year in share prices for Royal Caribbean demonstrates how volatile the cruise line market is, and has been for some time. June and November 2021 saw significant peaks, which failed to last long.

So too did February 2022, but that also proved unsustainable. Now, we’re making our way back up to where we were in February, but will this latest peak have a similar end result?

The latest news provides some hope, but also a potential point of failure. Royal Caribbean recently celebrated the laying of the keel for Icon of the Seas, its upcoming new vessel..

This vessel represents something particularly unique for Royal Caribbean, as it will be powered entirely by liquefied natural gas. Further, it will boast shore power connections as well as waste heat recovery systems designed to make the ship more economical to operate.

Wall Street’s Take

Turning to Wall Street, Royal Caribbean has a Hold consensus rating. That’s based on four Buys, four Holds, and two Sells assigned in the past three months. The average Royal Caribbean price target of $94.13 implies 12.3% upside potential.

Analyst price targets range from a low of $70 per share to a high of $136 per share.

Bearish Environment

Royal Caribbean has a lot of negative sentiment to overcome. While the analyst picture is mixed, the hedge fund front is in decline. The TipRanks 13-F Tracker reveals that hedge funds reduced their shares held by 363,900 last quarter.

That’s a comparatively small dip given that the hedge fund market owns a combined 6,575,647 shares, but it’s a dip nonetheless. Hedge funds were returning to Royal Caribbean, albeit hesitantly, from January 2021 to July 2021, but reversed course slightly in the months that followed.

Insiders, meanwhile, have been selling off briskly. Insiders sold shares valued at $2.6 million over the last three months.

Worse yet, Royal Caribbean’s dividend history has been at a dead stop since March 2020. Before then, it was a perfect standard of dividend stock, with its dividend increasing on a regular basis.

Hope Sails Eternal

The good news for Royal Caribbean is that cruising in general seems to be making a comeback. Rival Carnival (CCL) recently reported that the seven days between March 28 and April 3 actually represented a new record for cruise bookings.

It gets better from there. Empower Clinics (EPWCF) recently announced a new line of COVID-19 testing solutions for cruise passengers in Vancouver. This news comes with excellent timing.

A recent report from the Caribbean Princess revealed that the 100% vaccinated ship was sufficiently packed full of COVID-19 cases to require at least a portion of the 12th floor of the ship be used as an isolation ward.

This actually sounds much worse than it was; all the cases involved were either “mildly symptomatic” or completely asymptomatic.

Thus, all told, we have an improving environment for COVID-19 cases, which were crippling the cruise industry. We have improved bookings, as we saw with Carnival.

Also, we have Royal Caribbean building an entirely new and somewhat greener ship that should be less expensive to run in an environment where fuel costs have gone mad. That adds up to somewhat good news for investors here.

Concluding Views

Every time Royal Caribbean has seen a big run up in the last year, it’s lost that gain shortly thereafter.

Right now, it’s seeing a new run up once more. We likely won’t have long to wait to see if history holds true for a fourth time this year. Ultimately, no company lays out the kind of capital investment a new ship requires without expectation of return.

With the cruise market starting to come back online and new protective measures in place to keep regulators at bay, there may be hope yet that Royal Caribbean can actually maintain a gain for the first time in at least a year.

A return to 2019 levels over its current pricing would certainly be welcome. For the first time in a while, that seems like it might be possible once more.

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