We recently compiled a list of the 12 Most Undervalued Travel Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Royal Caribbean Cruises Ltd. (NYSE:RCL) stands against the other undervalued travel stocks.
The travel industry has rapidly evolved, with the leading businesses witnessing healthy growth and strong profit margins. The shift in source markets and destinations, increased demand for experiential and luxury travel, together with innovative business strategies continue to dramatically alter the industry landscape. Much of the travel demand is close to home. As per McKinsey, globally, domestic travel should grow ~3% annually, touching 19 billion lodging nights per year by 2030.
This is particularly true for the US, the world’s largest travel market. Around 68% of trips initiated in the US are to destinations within the country. Despite inflation and record costs weighing over Americans’ travel budgets, most of them will continue to travel. Most American consumers rank travel, domestic and international, as their “highest-priority” areas when it comes to discretionary spending.
Rise of Experiential Travel
Travel experts believe that there has been a growing focus on experiences as compared to material goods.
The demand for experiential travel should continue to rise heading into 2025 because consumers are prioritizing unique and memorable encounters over traditional travel consumption. This shift cannot be tagged as a passing trend, but it’s transforming the global tourism landscape. McKinsey believes that the experiential travel market should exceed ~$3 trillion by 2025. The growth should primarily be seen off the back of an increasing share of consumer spending on experiences like entertainment, adventure travel, and personalized excursions.
WNS believes that ~87% of the people globally agree that having a trip booked in the future provides them something to look forward to. With the pent-up demand unleashing, the upcoming 5 years are expected to see elevated expectations among travelers as they plan to make up for the lost time. Despite a bumpy ride for 4 years, the international tourist arrivals should touch pre-pandemic levels in 2024. However, inflationary concerns, climate change, and geopolitical tensions might keep the sector in a difficult spot.
Some countries and governments have done a better job in minimizing such risks and maximizing travel and tourism potential as per the Travel & Tourism Development Index 2024, published last month by the World Economic Forum.
What Are the Trends Shaping for Travel Sector?
As per the United Nations World Tourism Organization (UNWTO), international tourism should fully recover to pre-pandemic levels in 2024. UNWTO expects that there is still a significant headroom for recovery across Asia. Chinese outbound and inbound tourism should ramp up in 2024 as a result of visa facilitation and improved air capacity.
Total international arrivals are expected to significantly increase over the upcoming 2 years and will surpass pre-pandemic 2019 visitation in 2025 (as per the International Trade Administration). Total international arrivals should see an increase of 16.8% to 77.7 million in 2024, 9.7% to 85.2 million in 2025, and an increase of 7.0% to 91.1 million in 2026.
Since the bulk of travel spending remains close to home, McKinsey mentioned that 75% of travel spend is domestic. The US has been tagged as the world’s largest domestic travel market, with China well-placed to overtake it in the coming years. New markets like India, Southeast Asia, and Eastern Europe are the growing sources of outbound tourism. The travel spending of Indians should grow by 9% per year between now and 2030, with annual growth projections for Southeast Asians and Eastern Europeans coming at ~7% for both. Just like the launch of a jet engine significantly reduced travel times, AI continues to change the fundamentals of the travel industry.
As per estimates by McKinsey Digital, companies that holistically address digital and analytics opportunities can experience an earnings improvement of up to ~25%.
Our methodology
To list the 12 Most Undervalued Travel Stocks to Buy According to Hedge Funds, we used a Finviz screener to filter the stocks catering to the relevant industries and also looked into travel ETFs and online rankings. We gathered a list of 20 stocks and then narrowed our list to stocks that were trading at less than the forward earnings multiple of ~22.56x (since the broader market trades at ~22.56x). Finally, we ranked the stocks in ascending order of the number of hedge funds that have stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Photo by Mesut Kaya on Unsplash
Royal Caribbean Cruises Ltd. (NYSE:RCL)
Forward P/E Ratio as of 13 September: 12.72x
Number of Hedge Funds: 48
Royal Caribbean Cruises Ltd. (NYSE:RCL) operates as a global cruise company, which operates a fleet of vessels in the cruise vacation industry.
Wall Street analysts believe that consumer interest in travel maintained momentum for Royal Caribbean Cruises Ltd. (NYSE:RCL), resulting in robust demand and pricing (ahead of 2019 levels) at its business. Given the healthy advance booking patterns, the company is expected to report record pricing moving forward. Coming to the cost side of things, market experts opine that expenses will be better managed, with occupancy well-positioned to return to historical levels for 2024, driving profitability.
The company’s 2Q 2024 results were aided by stronger-than-anticipated consumer demand, robust onboard spending, strong pricing momentum, and solid cost containment measures. Royal Caribbean Cruises Ltd. (NYSE:RCL) continues to benefit from numerous new mega-ships, and more island destinations, together with re-entry into the Chinese market.
Royal Caribbean Cruises Ltd. (NYSE:RCL) released second-quarter EPS of $3.11 and adjusted EPS of $3.21. These results were better than its guidance as a result of stronger pricing on close-in demand, strength in its onboard revenue, and favorable timing of expenses of ~$0.15. Due to continued robust demand for vacation experiences, the company increased its FY 2024 adjusted EPS guidance to $11.35 – $11.45, or 68% YoY growth.
The company has seen exceptional demand for its vacation experiences, which supported its performance by posting significant yield growth over the past few years. Tigress Financial upped its target price on the shares of Royal Caribbean Cruises Ltd. (NYSE:RCL) from $155.00 to $210.00, giving the stock a “Buy” rating on 2nd August. Notably, 48 hedge funds held stakes in the company at the end of 2Q 2024, as per Insider Monkey’s database.
Ariel Investments, an investment management company, released its second-quarter 2024 investor letter. Here is what the fund said:
“Global cruise vacation company, Royal Caribbean Cruises Ltd. (NYSE:RCL), advanced on another quarterly earnings beat and subsequent raise in full-year guidance. Stronger than anticipated consumer demand, healthy onboard spend, robust pricing and solid cost containment lifted recent results. Additionally, RCL is benefitting from several new megaships, more island destinations and re-entry into the China market. The resiliency of the core cruise consumer, in combination with management’s superior operational expertise and revised earnings outlook, lays the foundation for RCL to exceed its three-year strategic imperative, the Trifecta Program, a year earlier than expected.”
Overall RCL ranks 7th on our list of the most undervalued travel stocks to buy according to hedge funds. While we acknowledge the potential of RCL as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that’s more promising than the stocks on our list, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
