Is Royal Caribbean Group a winning stock in the travel services industry?

The world’s second largest cruise line, Royal Caribbean Cruises Ltd. (RCL), based in Miami, Florida, owns three global cruise brands, including Royal Caribbean International, Celebrity Cruises and Silversea Cruises. Its brands operate around 58 vessels with 15 more on order. Its stock has gained 20.4% over the past year and 18.8% since the start of the year to close yesterday’s trading session at $86.30. However, the shares are currently trading below their 50-day moving average. And over the past five days, RCL has fallen 8.2%.

The company suffered massive losses last year due to pandemic-related travel restrictions. But recently announced positive data from Pfizer Inc. (PFE) for its COVID-19 oral antiviral treatment candidate, which has been shown to reduce the risk of hospitalization or death by 89%, has boosted investor optimism that to the recovery of the cruise industry. RCL shares rose after the press release. Moreover, if the breakthrough drug reduces the number of deaths, travel demand should rebound and allow cruise lines, including RCL, to turn the tide.

The business expects to generate positive cash flow by spring and be profitable for the full year of 2022. However, operational challenges persist and demand rebound is uncertain as the possibility of emerging new variants of the virus cannot be ruled out. In addition, the commercialization of the Pfizer drug is expected to take some time. Furthermore, RCL looks significantly overvalued at its current price level given its underlying fundamentals and with a beta of 2.62 the stock looks very volatile.

So here’s what could shape RCL’s performance in the short term:

Extended valuation

In terms of EV/futures sales, RCL is currently trading at 23.84x, which is 1,493.2% higher than the industry average of 1.50x. Its forward price-to-sales ratio of 12.98 is 891.2% above the industry average of 1.31. Additionally, RCL’s 4.07x futures price/pound is 11.4% above the industry average of 3.66x

Revenue growth does not translate into improved bottom line

RCL’s total revenue increased 1,456.4% year-over-year to $456.96 million in its fiscal third quarter, which ended Sept. 30. However, its operating loss was $1 billion, up slightly from the same period last year. Its net loss attributable to RCL rose 5.8% from its value a year ago to $1.42 billion. And the company’s adjusted loss per share was $4.91, versus the consensus estimate of $4.40, reflecting an earnings surprise of minus 11.6%. And its trailing 12-month net operating cash flow and leveraged cash flow reached $2.50 billion and $2.92 billion, respectively.

Low profitability

RCL’s negative gross profit margin of 199.45% is significantly lower than the industry average of 35.79%. Additionally, RCL’s ROE, ROA, and ROTC of negative 71.24%, 16.13%, and 8.04%, respectively, compare to industry averages of 17.25%, 6.25%, and 7 .65%.

POWR ratings reflect this bleak outlook

RCL has an overall F rating, which translates to a strong sell in our proprietary POWR rating system. POWR ratings are calculated by considering 118 separate factors, with each factor weighted to an optimal degree.

The stock has a D rating for quality, which is consistent with its lower profit margins than the industry.

RCL has an F rating for value. Its stretched valuations justify this rating.

Of the four F-rated shares in the Travel – Cruise sector, RCL is ranked No. 2.

Beyond what I said above, you can also check out RCL’s ratings for Sentiment, Growth, Momentum and Stability here.

Check out the top-rated stocks in the Travel – Cruise sector here.

Conclusion

With rising COVID-19 vaccination rates and easing travel restrictions, cruise lines are expected to see gains from pent-up near-term travel demand. However, RCL looks significantly overvalued at its current price level. Additionally, Wall Street analysts expect the stock to decline from its current level. Additionally, given the stock’s negative profit margins and weak bottom line, we think it’s best to avoid the stock now.


Shares of RCL were up $0.45 (+0.52%) in premarket trading on Friday. Year-to-date, RCL has gained 15.54%, compared to a 25.26% rise in the benchmark S&P 500 over the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a master’s degree in economics, she gained knowledge in equity research and portfolio management at Finlatics. Following…

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