Before the open, Carnival Corporation & plc (CCL) reported another strong quarter. Even the worst cruise line is now solidly profitable, leaving Royal Caribbean Cruises Ltd. (NYSE:RCL) incorrectly priced for the current earnings stream, much less the likely upside. My investment thesis is still Bullish for RCL even as the stock zooms to new all-time highs.
Positive Carnival Signs
Even the weakest of the cruise lines is now reporting solid profits in the off-peak months. Carnival reports quarterly results shifted towards the prime June, July and August summer cruising months in the same quarter, yet the cruise line still reported a solid $0.11 EPS in the May quarter.
The demand equation remains so positive that Carnival reported another record in customer deposits. The FQ2 '24 deposits reached $8.3 billion, providing a huge cash flow boost to the cruise line with the worst debt levels, with $1.1 billion in additional funds this year.
Carnival only reported a $90 million beat in the quarter for sales growth of nearly 18%. As a reminder, the cruise business began to reopen after nearly 2 years of shutdowns towards the end of 2021 and into 2022. The business was full speed ahead last FQ2 and the company still topped sales by $0.5 billion for the May quarter.
The cruise line produced FQ2 '24 revenues of $5.4 billion, topping the $4.8 billion level of FQ2 '19 before Covid. Carnival peaked at sales of $6.5 billion in the big August quarter before Covid and the numbers support a monster upcoming quarter with targets of a $1.11 EPS and revenues of $7.74 billion heading into the guide up.
Carnival even continues to see 2025 bookings top the 2024 levels. The market predicts minimal sales growth in the 5% range for FY25, but the company is pointing towards meaningful pricing power next year.
The cruise line is set to earn a $1.25 EPS in the last 3 quarters of the FY before the company hikes EBITDA targets by $200 million for the year to $5.83 billion. The cruise line hiked the EPS target for the year from analyst consensus of $1.01 to $1.18 now.
Royal Implications
The Carnival guidance provides confidence that cruise line demand isn't rolling over. In addition, investors questioning whether Royal Caribbean can hit the nearly $11 EPS target for 2024 should disappear now.
Royal Caribbean has much higher net yields and profit margins than Carnival. Just as important, though, Royal Caribbean remains heavily in debt, with the cruise line still stuck with $20 billion in net debt.
The company has over $30 billion in net PP&E, so the debt loads aren't a major concern as much as an opportunity. Royal Caribbean was hit with $419 million in net interest expenses in Q1'24 providing similar upside as with Carnival story where the reduction in interest expenses will provide substantial upside to earnings.
If Royal Caribbean cuts interest expenses by $1 billion, the company would see a big boost to EPS with only 281 million shares outstanding. The prime example of the difference in the cruise lines is how Royal Caribbean reported a massive March quarter profit of $1.77 per share, while Carnival squeaked by with an EPS of only $0.11 in the more favorable period ending in May. The large cruise line even produced ~$2 billion in extra revenues.
The big focus on the upcoming Q2 '24 earnings report for Royal Caribbean will be cutting the debt levels. Previously, the company regularly operated with half the net debt as now.
The stock has already rallied some $45 since the prior research report. The market now has far more confidence in Royal Caribbean not only hitting an $11 EPS in 2024, but also reaching the targets for $13 in 2025 and over $14.50 in 2026. The stock only trades at 11x EPS targets for 2026 and investor confidence will start to increase that these numbers are achievable.
Takeaway
The key investor takeaway is that Royal Caribbean probably has even more upside following the strong results from Carnival. Investors should continue riding the stock higher, with a breakout to new all-time highs indicative that the rally isn't over.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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