Stock Analysis & Ideas

Royal Caribbean: Promising Trends Not Enough to Offset Current Uncertainty, Says Analyst

The cruise line industry’s woes in 2020 have been perfectly reflected by Royal Caribbean’s (RCL) market performance. The stock is down by 55% year-to-date.

Last week, however, provided much needed respite. A secured $700 million loan from Morgan Stanley complimented the positive noises made by management on 2021 booking trends in the company’s recent earnings call, and were enough to send shares up by 16% in last week’s trading.

Yet despite the optimism, William Blair analyst Sharon Zackfia argues it is too early to cast doubts away.

The 5-star analyst reiterated a Market Perform (i.e. Hold) rating on RCL shares “given limited visibility on the pace of recovery considering uncertainty on the timing of a resumption of sailing.” The analyst has no fixed price target in mind. (To watch Zackfia’s track record, click here)

The $700 million loan will help pay the estimated $250-$290 million it is currently leaking every month while its ships are awaiting a return to action. That said, alongside the company’s cash preserving measures and 40% quarter-over-quarter decline in net cruise costs, RCL has been reducing the monthly cash burn rate. This is no doubt a positive development, as Zackfia acknowledges.

“Overall,” the 5-star analyst said, ”Royal’s cash burn improved sequentially each month during the second quarter, and management continues to seek additional opportunities for a further reduction in the company’s cash burn rate.”

Nevertheless, all voyages are currently suspended until at least the end of October, which means there have been 1,545 cancelled sailings in 2020. For the bookings left until the end of the year, the numbers – and prices – are significantly lower than last year’s figures. However, as stated by management, cruises for next year are so far “within historical ranges.”H

And while bookings for 1Q21 don’t stack up well when compared to the rest of the year, Zackfia noted, “bookings for the summer and second half of 2021 are significantly healthier on demand for Caribbean, European, and Alaskan sailings despite virtually no marketing support.” But, evidently, not healthy enough to warrant a rating upgrade just yet.

So, that’s William Blair’s view. Let’s have a look at what the rest of the Street has in mind for RCL shares. Based on 7 Buys, 8 Holds and 2 Sells, the analyst consensus rates RCL a Moderate Buy. However, going by the $54.38 average price target, shares are anticipated to be changing hands at a 10% discount over the next 12 months. (See RCL stock-analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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