The world's second-largest cruise company, Royal Caribbean Cruises Ltd. (RCL), which is based in Miami, Fla., owns three global cruise vacation brands, including Royal Caribbean International, Celebrity Cruises, and Silversea Cruises. Its brands operate approximately 58 ships with an additional 15 on order. Its stock has gained 20.4% in price over the past year and 18.8% year-to-date to close yesterday’s trading session at $86.30. However, the shares are currently trading below their 50-day moving average. And over the past five days, RCL has retreated  8.2%.

The company incurred massive losses last year due to pandemic-related travel restrictions. But recently announced positive data from Pfizer Inc. (PFE) for its COVID-19 oral antiviral treatment candidate, which was found to reduce the risk of hospitalization or death by 89%, buoyed investors’ optimism about the recovery of the cruise industry. RCL shares advanced following the news release. Furthermore, if the breakthrough drug does reduce fatalities, the demand for travel should rebound and enable cruise line companies, including RCL, to reverse their fortunes.

The company expects to generate positive cash flow by spring and be profitable for the entire year of 2022. However, operational challenges persist, and the demand rebound is uncertain because the possibility of new variants of the virus emerging cannot be ruled out. Also, the commercialization of the Pfizer drug is expected to take a while. Also, RCL looks significantly overvalued at its current price level, considering its underlying fundamentals and, with a 2.62 beta, the stock seems to be highly volatile.

So, here is what could shape RCL’s performance in the near term:

Stretched Valuation

In terms of forward EV/Sales, RCL is currently trading at 23.84x, which is 1,493.2% higher than the 1.50x industry average. Its  12.98 forward Price/Sales ratio is 891.2% higher than the 1.31 industry average. Also, RCL’s 4.07x forward Price/Book  is 11.4% higher than the 3.66x industry average

Top Line Growth Does Not Translate into Bottom-Line Improvement

RCL’s total revenues increased 1,456.4% year-over-year to $456.96 million in its  fiscal third quarter, ended September 30. However, its operating loss stood at $1 billion, up marginally from the same period last year. Its net loss attributable to RCL grew 5.8% from its year-ago value to $1.42 billion. And the company’s adjusted loss per share was $4.91, versus the $4.40 consensus estimate, reflecting an earnings surprise of negative 11.6%. And its trailing-12-months net operating cash flow and levered cash flow came in at negative $2.50 billion and $2.92 billion, respectively.

Poor Profitability

RCL’s negative 199.45% gross profit margin is substantially lower than the 35.79% industry average. Furthermore,  RCL’s ROE, ROA, and ROTC of negative 71.24%, 16.13%, and 8.04%, respectively, compare with the 17.25%, 6.25%, and 7.65% industry averages.

POWR Ratings Reflect This Bleak Prospects

RCL has an overall F rating, translating to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Quality, which is consistent with its lower-than-industry profit margins.

RCL has an F grade for Value. Its stretched valuations justify this grade.

Of the four stocks in the F-rated Travel – Cruises industry, RCL is ranked #2.

Beyond what I have stated above, one  can also view RCL’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the Travel – Cruises industry here.

Bottom-Line

With an increasing COVID-19 vaccination rate and the easing of travel restrictions, cruise line companies are expected to witness gains from pent-up travel demand in the near term. However, RCL looks significantly overvalued at its current price level. In addition, Wall Street analysts expect the stock to decline from its current level. Also, given the stock’s negative profit margins and weak bottom line, we think the stock is best avoided now.

RCL shares rose $0.45 (+0.52%) in premarket trading Friday. Year-to-date, RCL has gained 15.54%, versus a 25.26% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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