Wednesday, April 6, 2011

Royal Caribbean (RCL) Remains Unconvincing to Investors

Shares of Royal Caribbean Cruises (NYSE:RCL) are trading down today even though they received a rating boost from Credit Suisse (NYSE:CS).

Analyst Joel Simkins said, "While the new cruise cycle is still in its early innings, investing in these stocks requires a view that industry pricing power will continue to recover in the face of a still sluggish global economy."

"We believe RCL is well positioned to benefit from one of the most attractive and youngest fleets in the industry, strong relative earnings leverage (1% in net yield adds 7.3% to 2011 EPS versus 5.8% for CCL), disciplined fuel hedging strategies, and balance sheet deleveraging initiatives, which should allow it to generate earnings power above prior peak levels during the next few years. In addition, slowing supply growth and a better commitment to expanding returns over cost of capital should further assist in driving increased long-term earnings power."

A major problem the company faces in the short term is the unrest n the Middle East, where many of its destinations lie.

Long term they still need to convince shareholders and potential investors about the lack of free cash flow over recent years, which has mainly come from capex on new ships.

In other words, are they done expanding and ready to market, or are they still in the building out stage.

It appears this spending is already on the decline, and will probably drop more in the years ahead, resulting in free cash flow of $1.1 billion in 2011 and $1.7 billion in 2012.

Bulls think this is a good entry point.

Royal Caribbean was trading at $ 40.22, falling $0.29, or 0.72 percent, as of 12:02 PM EDT.

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