Royal Caribbean Stock Upgraded

Wall Street bankers are scrambling to get aboard this cruise stock

Its been less then a month since cruise ship operator Royal Caribbean Cruises (NYSE:RCL) reported its fiscal Q2 2018 earnings — less than a month, too, since the bankers at Barclays Capital announced they were upgrading Royal Caribbean based on those earnings. Since that upgrade came out, Royal Caribbean has already gained more than $10 a share (about a 9% increase). This tends to suggest that Barclays was on the right track in recommending it and now, Royal Caribbean Cruises is getting upgraded again.

UPGRADING ROYAL CARIBBEAN:

In an upgrade really reminiscent of Barclays’, this morning, analysts at Deutsche Bank announced that they are upgrading shares of Royal Caribbean. One month ago, Barclays said it thought the shares were worth perhaps $145 apiece. Today, Deutsche suggested a $146 target price in a buy recommendation covered on StreetInsider.com (subscription required). Seeing the share price spike at Royal Caribbean over the past month, Deutsche observed that it appears “investors are continuing to re-engage on cruise stocks.” This isn’t terribly surprising as Deutsche notes that the “valuation” on Royal Caribbean stock is “undemanding.” Earlier this month, I crunched the numbers and discovered that if Royal Caribbean succeeds in hitting its earnings target range of from $8.70 to $8.90 per share this year, then at the then-current share price of $114, the stock was trading for about 12.9 times current-year earnings. At today’s price of $124, the argument’s still similar — at the midpoint on earnings guidance, Royal Caribbean shares sell for about 14.1 times this year’s projected earnings.

A ROYAL REVIEW:

How does that compare to growth rates? When Royal Caribbean reported Q2 earnings on Aug. 2, the company noted that its earnings had climbed 28% year over year. For the full year, the company guided to more moderate growth of 17%. Analysts who follow the stock, meanwhile, have on average upped their estimates for longer-term (next five years) growth from 14% to nearly 15%. Any way you cut it, therefore, Royal Caribbean at 14-ish times current-year earnings looks attractively priced relative to its growth rate.The situation could be even better than that. One thing Deutsche focused on in its report was the potential for Royal Caribbean’s recent purchase of a 66.7% stake in luxury liner Silversea Cruises to accelerate its own earnings growth. “Many sell-side models have yet to incorporate the Silversea investment into 2019 forecasts,” writes Deutsche in its note, “(so we expect consensus [earnings growth estimates] to migrate higher).”

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