Here’s Why Royal Caribbean is the Best Cruise Line

While the pandemic affected everyone, cruise lines were especially hard hit.

They were forced to shut down operations for over a year. All of the big three carriers took on enormous amounts of debt just to survive.

Today, demand is higher than ever.

The question isn’t if they will survive, but who will come out on top.

Financial pros are betting on Royal Caribbean Cruises (RCL), according to our TrackStar data.

While it’s not the top search, it sees more consistent interest than the larger Carnival (CCL).

As we dug into the details, we found a lot of reasons why the big-money bets expect Royal Caribbean to come out on top.

Royal Caribbean’s Business

With a fleet of 64 ships, Royal Caribbean sails to over 1,000 destinations in over 120 countries on all seven continents.

Royal Caribbean operates its namesake brands, Celebrity Cruises, and Silversea. It also owns a 50% joint venture interest in TUI Cruises, which operates the German brands TUI Cruises and Hapag-Llyod Cruises.

U.S. passengers account for almost 3/4 of ticket revenue with the U.K. in second place with 10% of total revenues. 

Interestingly, North American cruises account for about 57% of revenues, with Europe bringing in about 35%.

Adding to its fleet, Royal Caribbean and its partners plan to take delivery of four new ships in 2024, two in 2025, and two in 2026. The company also plans to add new destinations as well.

Source: Royal Caribbean Q3 2023 Investor Relations

Financials

Source: Stock Analysis

After being decimated in 2020 and 2021, Royal Caribbean bounced back with a vengeance.

Revenues now exceed 2019 levels. However, as we see through gross margins, they have not entirely outpaced inflation, nor have operations regained their efficiencies.

However, the latest occupancy readings at 109.7% surpass the same quarter in 2019, while the 9-month occupancy rate of 105.7% is just below 2019’s 108.8%.

The real drag is the debt added during the crisis. Total debt jumped from $11.7 billion to $24.0 billion by 2022.

However, management is using its free cash flow to bring down the balance, which is now at $20.6 billion.

To give you an idea of the impact of the debt, free cash flow for the last 12-month period laned at $2.4 billion. Interest expenses came in at $1.5 billion. In 2019, interest expense was $408 million.

The majority of debt doesn’t come due until after 2027. However, there is $2.3 billion due in 2023, $2.8 billion due in 2025 and 2026, and $3.5 billion due in 2027.

Royal Caribbean’s cash flow is high enough that we expect them to easily meet these obligations and manage debt to pay down higher interest rates where possible, further improving overall profitability.

Valuation

Source: Seeking Alpha

Of the three major cruise lines, Norwegian Cruise Holdings (NCLH) trades at the highest earnings multiple yet the lowest cash multiple.

Royal Caribbean is the exact opposite, while Carnival is in the middle.

However, we only care about two things: who is growing and who is improving profitability.

Growth

Source: Seeking Alpha

We were a bit concerned with the forward revenue estimates listed here. So, after some digging, we found that the consensus for Royal Caribbean is 13.4% forward growth, 8.9% for Norwegian and 13.9% for Carnival.

That’s largely what we would expect given the pricing power, current and forecasted capacity.

The big concern with Norwegian is its capex currently exceeds its operating cash flow, which puts it in a very difficult position to manage its debt.

Carnival isn’t as bad, but it also doesn’t generate more cash than its capital expenditures.

This is a big reason why we like Royal Caribbean over its competitors.

Profitability

Source: Seeking Alpha

Lastly, we can see the impact of the interest on debt in the net income and the levered free cash flow margin, which accounts for interest expenses.

Clearly, Royal Caribbean is in the top position financially.

Our Opinion 9/10

While we believe there may be an opportunity to pick up shares of Royal Caribbean at lower prices, the cruise line’s far and away in the best position for the future.

Growth is certainly important. Yet, it’s better to spend on growth when it’s cheaper to do so rather than now when it costs an arm and a leg.

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