Speculation is rampant that the U.S. economy is entering a double-dip recession. What this means for the stock markets is anybody's guess, but it's probably not good. One company that will be hurt by waning consumer confidence is Royal Caribbean Cruise Lines (NYSE:RCL), whose cruise offerings are completely discretionary. Despite the doom and gloom that hangs over the economy, 91% of adult Americans in the workforce still have jobs, and those people will need time to de-stress. For this reason and three others, Royal Caribbean's stock is worth owning.
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Royal Caribbean's been a public company for 19 years. In that time, its stock has traded below $10 (split- and dividend-adjusted) just twice. The first time was right after its IPO in 1993, and the second was in early 2009. In both instances, you can count the number of days in months, not years. We have a floor price. Worst-case scenario is the world goes to pieces and the stock falls to $10. That's a paper loss of 58%. At that point, you'd be a fool not to be buying. In the past decade, Royal Caribbean's net margin dipped below 8% just once, in 2009, when it was 2.8% with earnings per share (EPS) of 75 cents. For the trailing twelve months (TTM), EPS was $2.68, and analysts estimate EPS will be $2.89 for all of 2011, down from $3.21 just 90 days ago.
Again, taking the pessimistic view, let's assume that 2012 EPS will be halfway between 75 cents, the worst performance in a decade, and $3.38, the consensus of 21 analysts. This gives us $2.07 and a forward P/E of 11.6. It's almost double its current forward P/E but still reasonable.
Now let's look at the upside. Its stock traded at an all-time high of $51.98 on December 29, 2004. Its enterprise value (EV) at the time was $17.3 billion, 15 times its EBITDA of $1.15 billion. Today, EV is 8.5 times EBITDA and dropping. While there might be reason for concern given the economy, I believe this has already been factored into its price.
Royal Caribbean and Peers
|Royal Caribbean Cruises (NYSE:RCL)||9.0||0.7||0.6|
|Las Vegas Sands (NYSE:LVS)||31.5||4.7||4.5|
|Wynn Resorts (Nasdaq:WYNN)||49.0||3.8||7.4|
|MGM Resorts (NYSE:MGM)||1.8||0.8||0.8|
Oil Prices Tumbling
With the global economic malaise, oil prices continue to tumble. Over $110 a barrel as recently as May, they're now below $90 and falling. Most investors probably assume this is a good thing for cruise operators because it lowers fuel costs. However, in the world we live in, anyone who uses a great deal of oil generally uses financial derivatives such as fuel swap agreements and call options to ensure they don't get hit too hard by rising oil prices. In Royal Caribbean's case, it has hedged 55% of its fuel needs for 2011 and 2012, 47% in 2013 and then scaled back from there. When fuel prices drop, the savings achieved from the drop in oil prices is offset by the cost of hedges in place at higher prices. Generally, it shouldn't have a material effect on the business in either direction. Call it a wash.
The reality is that fuel represents about 10.6% of revenue and is just one factor in a cruise lines' profitability. A much bigger expense in any given quarter is the commissions paid to travel agents for booking clients on a cruise. They represent 16.9% of revenue and are vital to Royal Caribbean's success. Without customers, there's zero need for fuel. I wouldn't make too big of a deal about fuel prices in either direction.
Richard Fain bought 66,000 shares August 26 at a price of $22.72 a share. His $1.5 million open-market purchase is the best indicator I know of that Royal Caribbean's share price has hit bottom. Sure, its stock might drop a few more dollars in the coming days, but it'll bounce back on good news. This wasn't some exercise of stock options. Rather, Fain was using his own money to buy his company's stock at discount prices.
Now compare this with Alan Mulally, CEO of Ford (NYSE:F). Hailed by many as the 2010 CEO of the Year, as of May, Mulally hasn't bought any Ford stock on the open market despite being paid $26.5 million in 2010. Fain, on the other hand, made $8.6 million and he did. Go figure. I guess he needs to make up the difference using Royal Caribbean stock. (For related reading, see What Investors Can Learn From Insider Trading.)
The Bottom Line
On a personal note, I got married on a Royal Caribbean cruise ship. The experience will live with me forever, and I'll always have a soft spot for the cruise line. Once upon a time, I owned its stock. I don't know but it's definitely time for me to reconsider.
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