Royal Caribbean Cruises (NYSE:RCL) stock has soared over the past 12 months, mirroring the growth we’ve seen from tech and artificial intelligence stocks. Currently, Royal Caribbean shares are up 116% over the past year. However, there have been plenty of tailwinds, with robust demand for travel experiences post-pandemic, allowing Royal Caribbean to benefit from record pricing and strong earnings. And that’s why I’m bullish. Despite the share price surging, I still believe Royal Caribbean could go higher.
Rebounding
Royal Caribbean Cruises stock has just surpassed its pre-pandemic high, reflecting impressive earnings, strong demand, and a performance initiative that appears to be working. The firm, which runs three global cruise brands — Royal Caribbean International, Celebrity Cruises, and Silversea Cruises — highlighted its stellar results for 2023 in February, noting improved margins and robust demand, as it beat its own guidance for the year.
Royal Caribbean said that this strength would continue into 2024, with the company providing adjusted earnings per share (EPS) guidance in the range of $9.90 to $10.10 per share, up from adjusted EPS of $6.77 in 2023.
Multiple Tailwinds
The firm’s profitability is supported by expanding margins. Adjusted EBITDA margins rose throughout the year, reaching 32.7% in the fourth quarter of 2023. The Miami-based company recorded an EBITDA margin of 30.1% for the year as a whole, up significantly from 15.7% in 2022. This improved performance can be traced to several factors, with the first being demand.
Royal Caribbean said that demand for its brands continues to outpace the broader travel space as consumer spending habits have shifted toward experiences.
Moreover, Royal Caribbean says it expects to achieve two of its Trifecta goals in 2024, one year earlier than anticipated. The Trifecta goals are related to the company’s three-year program designed to improve financial performance by the end of 2025. Management says the company is on track to achieve triple-digit EBITDA per available passenger cruise days (APCD) in 2024 — surpassing 2019’s record adjusted EBITDA per APCD of $87 — and return on invested capital (ROIC) above the pre-pandemic high of 10.5%.
Finally, there are Royal Caribbean’s economies of scale, which also positively contribute to the top line in the form of interest in big ship cruising. It’s one of the “Big Three” cruise operators, with a sizeable fleet, including 28 under the Royal Caribbean brand and 15 under the Celebrity Cruises brand.
Coupled with a huge logistics network, Royal Caribbean is able to operate more efficiently than many of its peers. However, the cruise liner also owns some of the largest vessels in the world, including the largest cruise vessel — the Icon of the Seas — which entered service in January. Management highlighted in its 2023 earnings report that interest in the vessel was strong and would support further growth in 2024.
Moving forward, it’s perhaps worth remembering the disruption that the pandemic caused. Of course, we all hope that we never have to live through another pandemic. However, the virological environment remains a constant, albeit distant, threat.
It’s perhaps worth recognizing that a proportion of the cruising community, those in the retired bracket, are more risk-averse than the broader population. We can also hypothesize about the impact of potential post-U.S.-election tax hikes on consumer spending, but currently, this doesn’t look like a reality.
The Valuation
Royal Caribbean is currently trading at 13.9x forward earnings. That actually doesn’t put it at a premium versus its peers. And this forward earnings ratio is expected to fall to 12x in 2025, 10.3x in 2026, and 8.4x in 2027. In fact, the forecasts available suggest that earnings could compound at a rate of 17.8% over the medium term. In turn, this results in a forward price-to-earnings-to-growth (PEG) ratio of 0.78.
While I understand that these forecasts could be a little bullish, it’s certainly encouraging. For me, the PEG ratio is the most important indicator of value. A PEG ratio of 0.78 suggests that we have some room for error in our forecasting and that a slight downward revision to the company’s trajectory wouldn’t impact my position on the stock.
Is RCL Stock a Buy, According to Analysts?
According to analysts who have covered the stock in the past three months, Royal Caribbean is rated a Strong Buy. The stock has 12 Buys and two Hold ratings. The average Royal Caribbean Cruises stock target price is $150.67, indicating 8.4% upside from the current share price. The highest share price target is $174, while the lowest share price target is $115. This positive consensus reinforces my bullish position on the stock.
The Bottom Line
There are clearly more tailwinds than headwinds for this cruise line operator. Demand has proven robust, and there appears to be an increasing shift towards experience-focused vacations, like cruising. Equally, it looks attractive from a valuation perspective, with its forward PEG ratio suggesting that the company remains significantly undervalued despite the stock surging 116% over 12 months.
