Royal Caribbean (RCL) performed poorly over the past three months, likely due to concerns about COVID-19 restrictions that could tighten to stop the spread of the coronavirus, including Omicron, the most recent mutation.
Since I believe that market conditions will be tough for the company in the coming months, I would not buy shares of this stock, which is certainly not amid top analysts’ stocks. Essentially, I am neutral on the stock.
Based in Miami, Florida, Royal Caribbean is a global leader in the cruise ship industry, holding a fleet of 60 ships serving destinations in more than 800 different locations around the world.
Royal Caribbean is the owner of the cruise brands Royal Caribbean International, Celebrity Cruises, and Silversea Cruises. The global cruise ship company also has a 50% stake in a joint venture that operates 13 ships under TUI Cruises and Hapag-Lloyd Cruises brands.
Q3 Earnings Results
Despite more ships coming into service, bringing the company’s sailing capacity to 65% of the total, the COVID-19 pandemic continued to affect the company in the third quarter of 2021.
Its third-quarter income statement ended with an adjusted net loss of $4.91 per share. It was a slight improvement from the corresponding quarter in 2020, when the adjusted net loss was $5.62 per share. However, it missed the average consensus estimate by $0.70.
Total revenue came in at $457 million, missing projections by $162 million.
The company also noted improvements in onboard revenue performance and cash flow from vessels on core routes.
In addition, a strong September meant that Q3 outpaced Q2 with new bookings for 2022 sailings. So far, sailings for the 2022 cruise season are booked in line with historic margins, albeit at higher prices than in 2019.
Omicron Outlook
Against Omicron, the vaccines currently in use will need to be updated to be as effective as previous variants, and it is said it could take three to four months for the adjustment to be completed.
Meanwhile, the increase in government measures to prevent the spread of Omicron could slow down the economic recovery. That’s what investors are afraid of these days.
This scenario is not healthy for Royal Caribbean Cruises (RCL) and other operators who desperately need to manage their vessels at full capacity and freely offer all onboard services to their customers.
Thus, Omicron could force Royal Caribbean Cruises to lower its expectations, which the market wouldn’t appreciate if it did.
Looking Ahead for Royal Caribbean
The company expects cruise ships to return to full capacity by next spring. In addition, the load factors should be back in line with historical trends by the third quarter of 2022 at the latest.
Wall Street’s Take
In the past three months, five Wall Street analysts have issued a 12-month price target for RCL. The company has a Hold consensus rating, based on four Holds and one Sell assigned.
The average Royal Caribbean price target is $79, implying 1.8% upside potential.
Summary
Omicron is a substantial risk for companies operating in the travel services sector, including Royal Caribbean Cruises. The stock price could fall further if COVID-19 restrictions are tightened globally.
Disclosure: At the time of publication, Alberto Abaterusso did not have a position in any of the securities mentioned in this article.
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