Royal Caribbean has been treading water for the past six months, recording a small return of 2.8% while holding steady at $285.50. The stock also fell short of the S&P 500’s 8.4% gain during that period.
Is there a buying opportunity in Royal Caribbean, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Royal Caribbean Will Underperform?
We’re swiping left on Royal Caribbean for now. Here are three reasons we avoid RCL, plus one stock we’d rather own.
1. Weak Growth in Passenger Cruise Days Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Royal Caribbean, our preferred volume metric is passenger cruise days). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Royal Caribbean’s passenger cruise days came in at 14.87 million in the latest quarter, and over the last two years, averaged 7% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Free Cash Flow Projections Disappoint
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts’ consensus estimates show they’re expecting Royal Caribbean’s free cash flow margin of 7.5% for the last 12 months to remain the same.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Royal Caribbean historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
Final Judgment
We see the value of companies helping consumers, but in the case of Royal Caribbean, we’re out. With its shares lagging the market recently, the stock trades at 16.3× forward P/E (or $285.50 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. Let us point you toward a top digital advertising platform riding the creator economy.
Stocks We Like More Than Royal Caribbean
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