6. Royal Caribbean Cruises Ltd. (NYSE:RCL)
1-Year Price Performance: 128.50%
Number of Hedge Fund Holders: 52
Royal Caribbean Cruises Ltd. (NYSE:RCL) is a global cruise business that provides cruises under the Royal Caribbean International, Celebrity Cruises, and Silversea Cruises brands, among others, covering a variety of itineraries. As of this year, the company operates 68 ships under these brands.
On February 7, Tigress Financial maintained its Buy rating on Royal Caribbean Cruises Ltd. (NYSE:RCL) and raised its 12-month price target to $330, noting the company’s strong Q4 performance as a driver of its bullish view. In the fourth quarter, RCL reported an adjusted EPS of $1.63, above analysts’ forecasts of $1.50. It also reported a 13% rise in revenue to $3.8 billion. The company’s development of its fleet and land-based resort facilities, as well as strong cruise demand, have contributed to revenue and cash flow increases. Looking ahead, it anticipates net yields to climb by 2.5% to 4.5%.
The company’s investments in additional ships and land-based resorts are also intended to boost its share of the vacation travel industry. In that vein, Royal Caribbean Cruises Ltd. (NYSE:RCL) recently announced the development of its exclusive destination portfolio, including Perfect Day Mexico, which will open in 2027, and the upcoming Royal Beach Club projects in the Bahamas and Cozumel, Mexico.
Recurve Capital stated the following regarding Royal Caribbean Cruises Ltd. (NYSE:RCL) in its Q4 2024 investor letter:
“Cruise companies (Royal Caribbean Cruises Ltd. (NYSE:RCL) and NCLH) – 12% of assets as of 12/31/2024
The cruise lines are disruptive in the vacation market. They offer extraordinary, high-satisfaction experiences at great value compared to land-based alternatives. The scale of demand they generate in their businesses allows them to build bigger and better assets, including new portfolios of private destinations which elevate satisfaction while keeping customers (and their wallets) captive within the cruise ecosystem all day. These private destinations magnify the returns of all the vessels that visit these destinations and improve ROIC across their asset portfolios. They have meaningful opportunities to continue these and other innovative expansions over the coming decades. I recommend reading our recent Insight about RCL’s private resorts.
With only 2% market share in vacations and less than 10% of all Americans ever having taken a cruise (but with high repeat rates), the sector has a long way to go before it reaches maturity – especially as the operators keep elevating the quality of the assets and the experiences they can deliver to guests. There remains a significant price differential between cruise vacations and their land-based alternatives, but cruising is not just a value play. The experience is unique and compelling outside of its superior economic value. These are not like customers looking to trade down from a Ritz Carlton to a Marriott to save money – these are vacationers looking for a unique experience that only cruising can deliver.
RCL and NCLH trade at relatively modest P/E multiples. They have highly visible future capacity growth since newbuild pipelines are contracted years in advance. Their normalized growth algorithm is straightforward and reminds me of the old cable equity algorithm (back when there was growth in cable!): modest capacity growth + modest pricing growth + cost growth below inflation = HSD/LDD revenue growth and LDD-mid-teens earnings growth. If we layer on accretive balance sheet actions that are now opening up in the post-Covid recovery period (reducing interest expense and returning capital to shareholders), we can get to >20% medium-term EPS CAGRs.
Both RCL and NCLH trade at undemanding valuations because most investors treat them as cyclicals trading at or near peak earnings or peak pricing power. There will always be periods of relative strength and weakness, but the long-term trendline on pricing is up – well above inflation. It would take a severe recession for pricing to turn negative.”
