Three trusts which operate for the benefit of family members of Royal Caribbean Cruises Ltd. (NYSE:RCL) purchased a total of nearly 27,000 shares of stock on July 29th at an average price of $36.82 per share, according to a filing with the SEC. Insider Monkey tracks insider purchases because in theory they should signal at least some degree of confidence in the company; otherwise, it would be rational for insiders to diversify their wealth in other investments instead. Studies in fact show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading). The $8.2 billion market cap cruise ship company is up 46% in the last year, outperforming the S&P 500.
Royal Caribbean Cruises Ltd. (NYSE:RCL) recently reported its results for the second quarter of 2013. Revenue edged up by 3% versus a year earlier, and with costs held in check operating income grew by 17% and earnings beat expectations. However, the cruise business is seasonal and so Q3 should provide the significant majority of Royal Caribbean Cruises Ltd. (NYSE:RCL)’s earnings per share for this year. Wall Street analyst forecasts are for a very small increase in EPS relative to the prior year period, to $1.71; holding to consensus for the rest of the year would yield a current-year P/E multiple of 16.
Year to date Royal Caribbean Cruises Ltd. (NYSE:RCL) has generated about $670 million in cash flow from operations. Most of this cash has been used on capital expenditures, but the company has slightly reduced its debt (enterprise value is about twice the current market cap) and paid a modest dividend yield of 1.3%. In part due to its high leverage, and in part due to the sensitivity of cruise demand to the overall economy, Royal Caribbean Cruises Ltd. (NYSE:RCL) features a beta of 2.8.
As part of our research on investment strategies, we at Insider Monkey maintain a database of quarterly 13F filings from hundreds of hedge funds and other notable investors; we have discovered through our research that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year. According to these filings, John Thaler’s JAT Capital Management initiated a position of 2.5 million shares in Royal Caribbean during the first quarter of 2013 (check out more stocks Thaler was buying).
Royal Caribbean Cruises Ltd. (NYSE:RCL)’s larger peer, Carnival Corporation (NYSE:CCL) has struggled with operating issues at its cruise lines over the past few years (such as the Costa Concordia incident) and so has not been as strong a performer in the market.
The second quarter of Carnival’s fiscal year ended in May, with the company recording a slight decline in sales from their levels a year ago. Reported earnings increased, but this was entirely due to smaller unrealized losses on fuel derivatives; in fact, operating income was down. Of course, Carnival also generates most of its annual earnings in the current fiscal quarter.
Carnival actually trades at a premium to Royal Caribbean in terms of expected current year earnings, despite the weaker financials year to date. Its forward earnings multiple of 17 also represents a higher valuation relative to its smaller peer (which is valued at only 12 times forward earnings estimates). The company is larger in terms of market capitalization and does offer a somewhat higher dividend yield (at an annual rate of 2.7%) but those two factors don’t seem to justify this higher pricing given the disadvantages we’ve mentioned.
Of course even with Royal Caribbean the forward earnings multiple isn’t particularly low given the company’s low sales growth. In addition, the stock’s prospects are highly dependent on how this quarter’s financials turn out. While the insider purchase is a plus, investors who are even interested in buying cruise ship companies at all would probably want to wait for the Q3 results before evaluating Royal Caribbean further.
Disclosure: I own no shares of any stocks mentioned in this article.
