Royal Caribbean: Smooth Sailing Ahead

09/04/2014 7:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

The cruise ship industry, remember, is highly cyclical; booking on the mammoth ships can fall precipitously when rough economic waters arrive, notes Mike Cintolo, editor of Cabot Top Ten Trader.

Royal Caribbean (RCL) is strong because investors have been blown away by recent impressive results, as well as forecasts for much more growth ahead.

But Royal Caribbean is thriving today not just because of a good economy (trends are very strong in China and Europe, as much of the growth in the sector is coming from overseas…though Caribbean cruises continue to see pricing pressure), but also because of a huge fleet modernization during the past couple of years, as well as the ills of Carnival, the largest firm in the industry.

All in all, management is very bullish on the future, aiming to double its return on capital and earnings by 2017 via moderate capacity growth (averaging 5% annually during the next few years) and higher efficiencies, which should lead to higher dividends (current yield is 1.6%) and share buybacks.

We’re not treating those forecasts as sure things—again, a global economic hiccup anytime during the next few years will surely affect business—but the main point is that business is thriving today and there’s nothing standing in the way of another few very good quarters for the company, at least. Earnings are expected to rise 42% this year and 30% in 2015.

RCL broke out last October and has been having a good run since. We think it’s still a decent buy as shares formed another, second stage base from mid-March through mid-July before busting loose on earnings.

It took the recent market shakeout in stride, too, telling us big investors aren’t too eager to let go of their shares. We think buying on dips makes sense, possibly toward the 25-day line (now nearing $61.5).

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