We came across a bullish thesis on Royal Caribbean Cruises (NYSE:RCL) on ValueInvestorsClub by petritxolbcn. In this article, we will summarize the bulls’ thesis on RCL. The company’s shares were trading at $225.27 when this thesis was published, vs. the closing price of $227.23 on Jan 13.
A luxury cruise ship in motion in the ocean, with passengers enjoying the view on the deck.
RCL operates as a cruise company worldwide. The company operates cruises under the Royal Caribbean International, Celebrity Cruises, and Silversea Cruises brands.
The cruise business is part of a $2 trillion holiday market. The penetration level to these markets is extremely low with only 10% of Americans and less than 1% of Asians having been on a cruise ship. The diversity of its offerings makes it a perfect fit for all generations. The demand is projected to grow at double-digits with the supply side expanding at only 3-5%.
The financials also make RCL a very attractive prospect. A new ship has an estimated capex of $1.8 billion ($1.5 billion debt at 3% interest + 0.3 billion equity). With an ROIC of 18%, $45 million interest expense and $120 million amortization for 12 years, the ROE stands at 53%. Such a high return is possible for larger brands like RCL which have better economies of scale, established port agreements and seamless logistics.
Another strength of this business is the high retention rate. More than 90% of the guests have a high satisfaction rate. This translates to 60% of the business being driven by repeat customers. The potential to access the untapped market combined with multi-channel outreach like mobile applications can improve margins and drive EPS growth higher by 15%.
The private destination portfolio is a segment that offers a high-growth opportunity for RCL. Earlier the services were limited to basic activities like snorkeling, without much attention given to aspects like entertainment and dining. RCL has transformed this experience by introducing waterparks, ziplines and rentable bungalows. The pipeline of private holiday destinations is being expanded to Paradise Island Nassau, Cozumel, Lelepa Vanuatu and Mexico. The number of tourists from these new destinations is expected to be twice that of the current visitor count. The existing CoCoCay venue offers incremental revenue of $540 million, with a gross margin of 80%.
The increase in business opportunity from low market penetration and an increase in private destinations should propel the EPS to $30 by 2030. This makes the P/E based on expected EPS almost 7x, a reasonable valuation given the growth and return prospects for RCL.
While we acknowledge the potential of RCL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than RCL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
