Earnings Momentum Will Recover As New Vessel Deliveries Accelerate Through 2028

Key Takeaways

• New ships and enhanced experiences are boosting revenue through higher onboard spending and pre-cruise purchases, driving per-passenger spend growth.
  
• Strong financial management, loyalty programs, and moderate capacity growth initiatives position the company for long-term market share and revenue growth.
  
• Heightened macroeconomic uncertainty and potential consumer spending decline risk impacting Royal Caribbean's revenue, margins, profitability, and competitive pricing ability.

Catalysts

Operates as a cruise company worldwide.

• The introduction of new ships like Star of the Seas and Celebrity Xcel, coupled with existing fleet performance, is expected to drive yield growth between 2.6% and 4.6% in 2025, positively impacting revenue and earnings.
  
• Enhanced guest experiences, investments in private destinations, and new ships are driving higher onboard spending and pre-cruise purchases, which should support revenue growth by increasing per-passenger spend.
  
• The company's financial position, characterized by investment-grade ratings, strong cash flow generation, and a focus on maintaining a flexible balance sheet, positions the company to effectively manage costs and improve net margins.
  
• Royal Caribbean's continued focus on loyalty programs, which have increased customer retention and spending, suggests long-term revenue enhancement as repeat visitors book more frequently and spend more per trip.
  
• Moderate capacity growth initiatives, including the ongoing introduction of game-changing ships and expansion of exclusive destinations, aim to capture market share in the $2 trillion vacation market, supporting long-term revenue and EPS growth.

Royal Caribbean Cruises Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Royal Caribbean Cruises's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.0% today to 26.2% in 3 years time.
• Analysts expect earnings to reach $5.9 billion (and earnings per share of $22.34) by about September 2028, up from $3.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $5.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, down from 26.0x today. This future PE is lower than the current PE for the US Hospitality industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 1.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.97%, as per the Simply Wall St company report.

Royal Caribbean Cruises Future Earnings Per Share Growth

Risks

• The heightened uncertainty in the macroeconomic environment presents a risk that could impact consumer behavior and spending, potentially affecting Royal Caribbean's future revenue and earnings.
  
• Continued dependence on consumer discretionary spending, which may decline in an economic downturn, could pressure pricing and onboard spending, impacting revenue and net margins.
  
• Although recent trends are positive, the risk of a potential slowdown in close-in bookings remains a concern, which could affect the company's yield and overall profitability if consumer confidence weakens further.
  
• Royal Caribbean's ability to maintain price integrity amidst varying market conditions could face challenges, risking future yield growth and revenue generation should competitive pricing pressures intensify.
  
• Uncertainties around currency exchange rates and fuel prices, while currently favorable, could reverse and adversely impact the company’s earnings and operational costs, affecting overall profitability.

Valuation

• The analysts have a consensus price target of $351.652 for Royal Caribbean Cruises based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $420.0, and the most bearish reporting a price target of just $218.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $22.4 billion, earnings will come to $5.9 billion, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 9.0%.
• Given the current share price of $345.31, the analyst price target of $351.65 is 1.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.