Royal Caribbean: Off To The Races (NYSE:RCL)

Royal Caribbean Cruises Ltd. (NYSE:RCL) issued a proclamation of a Trifecta of targets for 2025 and the market mostly ignored these goals deemed too lofty for the beaten-down sector. After the Q1 2023 earnings report, investors appear to finally grasp the opportunity to reach what once appeared lofty goals. My investment thesis remains ultra-Bullish on the cruise line and the sector, even with Royal Caribbean roaring past $70.

Boom Times Ahead

Royal Caribbean reported another quarter of losses for Q1 ’23, but the management team was very clear that massive profits are ahead in the quarters and years coming up. The company saw yields rise 5.8% versus 2019 levels in a sign of the improving business.

The cruise line reported Q1 revenue of $2.9 billion, up from $2.5 billion in Q1 ’19. Royal Caribbean still reported a large EPS loss of $0.23, but the company was clear this is the last quarterly loss in the cards and the reported loss smashed analyst estimates for a loss of $0.69.

Royal Caribbean forecast a Q2’23 EPS of $1.55 leading to a large $4.60 EPS for the year and topping the prior estimate by an amazing 40%. Despite the company projecting a $10+ EPS in 2025, analysts only forecast a $8.36 target for the year.

Investors face one of the few scenarios where analysts aren’t backing up the forecast of management. The stock is soaring on the 2023 guidance boost, as the market finally appears to be catching on to the real prospects for a record EPS despite the higher debt levels and increased share counts.

Another helping factor was Royal Caribbean producing $1.3 billion worth of operating cash flows due to the record breaking bookings during the prolonged WAVE season. At the end of March, the cruise line now has $5.3 billion worth of customer deposits, up from $4.2 billion as of the end of 2022.

The amazing part is that Royal Caribbean Cruises Ltd. management is guiding to record EBITDA levels in the first year of the recovery from Covid restrictions. The cruise line didn’t even get off to a great start in Q1, yet the business is already heading to record numbers.

Pushing Past Higher Debt

If not for the higher interest expense levels of $1.3 billion and higher share counts, Royal Caribbean would already be reporting a record EPS. The market took a while to fully comprehend that other financial metrics would quickly soar past the 2019 levels with total GDP approaching levels of being 20% above those prior levels.

The cruise line ended 2022 with net debt at $21.5 billion after entering the crisis closer to $10.0 billion in net debt. The company ended March with net debt at $20.2 billion following the strong operating cash flows and only spending $252 million on capex during the quarter.

The cruise line is spending heavy on new ships in order to expand capacity over the next few years. Royal Caribbean Cruises Ltd. plans to spend $4.2 billion in capex this year and will add 3 new ships to the fleet boosting capacity by over 20% by 2024.

Royal Caribbean won’t directly pull down debt in the short term due to these investments, but the cash flow will immediately go to building up the PP&E asset, providing future borrowing capacity. The ultimate key is positive cash flows from operations will improve the balance sheet one way or another.

The strong WAVE season and earnings forecast sets up a scenario where investors shouldn’t have a reason to doubt the Trifecta forecasts, including the $10+ EPS target. Even after the rally today, Royal Caribbean only trades for 7x the 2025 EPS target and still only 16x the boosted 2023 target.

Royal Caribbean Cruises Ltd. now absorbs up to $1.0 billion in additional annual net interest expenses while still forecasting the massive $4.60 EPS for the year. Based on the current share count, Royal Caribbean will ultimately boost EPS by $3+ to just bring the interest expense in line with 2019 levels.

Takeaway

The key investor takeaway is that Royal Caribbean Cruises Ltd. is off to the races now. The business is firing on all cylinders and generating positive cash flows to start repaying debt or purchasing new ships.

Royal Caribbean Cruises Ltd. stock is too cheap based on the 2025 EPS targets of $10+. Investors should use weakness to continue purchasing the cruise line on the cheap, though hopefully most investors already bought sizable Royal Caribbean Cruises Ltd. positions at lower levels.