Rough seas ahead for Royal Caribbean
Today's Financial News - Posted June 29, 2009
The situation cannot get much worse for the nation’s tourism industry. Royal Caribbean (NYSE:RCL) hit the Street with lowered earnings estimates this morning. It may be time for the shorts to start making their move.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): Life for Richard Fain cannot feel like a vacation these days. Unless the world’s oceans suddenly dried up, it is hard to imagine operating conditions for Royal Caribbean (NYSE:RCL) much worse than they are today.
Combine a nasty recession that is keeping vacationers at home with rising fuel prices and a flu pandemic and you see why going to the office may cause high levels of stress for the cruise line’s 61-year-old CEO.
The airline industry has similar woes, but at least flying is an economical mode of transportation. The cruise industry, on the other hand, relies solely on discretionary income.
We do not hop on a floating city to get from Point A to Point B, like we do with planes.
We do it to go from Point A to Point B to Point C and back to Point A, hopefully spending lots and lots of money along the way.
When that money starts to dry up, basic business skills tell us to lower prices to increase volume.
But what happens when you lower prices and tourists still won’t board your floating Petri dish out of fear of picking up the latest version of the swine flu?
No matter how good the food coming from your galley tastes, nobody wants to pay for it if they think it’ll be coming right back up in a few minutes.
Cutting the outlook
Even if the cruise industry could incentivize tourists to hop aboard with lower prices, it won’t do much good if costs are surging in the opposite direction.
Now that crude prices have reached OPEC “targets” around the $70 level, operators like Royal Caribbean are striking millions from their earnings estimates.
Just this morning, Royal Caribbean told the Street to expect at least $0.12 less in quarterly earnings thanks to increasing energy prices. For every 10% change in fuel prices, the company tells us, earnings will be effected by about a dime.
The swine flu has already taken $0.22 per share off of the company’s earnings estimates, so there is not much black ink left if crude prices go much higher. Right now, analysts expect about $1.09 per share in annual earnings.
Just like most equities, shares of Royal Caribbean have soared over the past few months, rising from lows of $5.40 and climbing to highs of close to $17 before settling back to today’s prices in the $13.30 per share range.
With nearly 13% of the company’s float sold short, there are plenty of investors believing the latest combination of industry forces will deal a serious blow to the cruise line’s profit potential.
I have to concur.
Unless the nation’s economy gets moving in a positive direction real fast, real soon, next year’s earnings are going to get discounted as well. Investors have already written this year off as one of the industry’s worse, but there are few investors that believe next year can be just as bad.
We may not have the swine flu, but we will certainly see double-digit unemployment and quite possibly drastically higher fuel prices.
If that is the case, Royal Caribbean had better start offering even more debt than the $250 million in senior notes it announced this morning. It will need to the cash to get through some very strong headwinds
Options players should be taking a long look at the company’s September put contracts. They are fairly expensive today, but they will not be getting any cheaper anytime soon.
There are rough seas ahead for the cruise industry.
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July 8th, 2009 at 2:34 pm
Perhaps the cruise industry should drop the Single supplement on itineraries that are sailing with empty cabins. Many people would like to cruise single, but having to pay for one and a half to two people to get a cabin is very prohibitive. Seems like a simple way to gain some extra passengers without having to do anything other than change a policy. Unfortunately this is one of those sacred cow issues. The industry is very reluctant to offer this option as they will eventually have to take it back as the world recovers.