Royal Caribbean Cruises

01/14/2015 7:00 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Energy stocks usually suffer when oil and gas prices drop; but the remaining 92% of stocks in the S&P 500 benefit from lower oil and gasoline prices, which reduce costs and pad their bottom lines, suggests Elliott Gue, editor of Energy & Income Advisor.

One beneficiary—our Conservative Pick for 2015—is a cruise operator with 41 in-service ships and almost 99,000 berths. Overall, Royal Caribbean Cruises (RCL) controls about 23% of global capacity.

Fuel accounts for almost 12% of the firm’s total operating expenses; the company historically has hedged between 40 and 60% of its expected fuel expense.

The firm aims to double its 2014 earnings per share by 2017 and increase its return on invested capital from 5.5% to the double digits. Based on third-quarter results and 2015 guidance, it is well on its way to achieving both goals.

And the firm has invested heavily in new cruise ships and revitalizing older vessels in recent years, suggesting that capital expenditures should decline over the next few years, bolstering free cash flow. This younger fleet also gives Royal Caribbean Cruises a leg up on the competition.

We also like management’s plan to expand in the fast-growing Chinese market. Next summer, the Quantum of the Seas will relocate from the US to China. As a result, total capacity in the Asia-Pacific region will increase to 15% of the global fleet from 12%.

With reduced investment in fleet revitalization, robust demand, and modest capacity growth in the industry, Royal Caribbean Cruises’ free cash flow should grow significantly over the next three years.

We expect the company to deploy that cash to reduce debt and in its quest for an investment-grade credit rating and return cash to investors through a combination of higher dividends and share buybacks. Royal Caribbean Cruises rates a buy up to $90 per share.

Subscribe to Energy & Income Advisor here…

For More 2015 Top Stock Picks

Related Articles on STOCKS