RCL Stock: Thanks to a Beating, Royal Caribbean Is a Bargain Buy

Royal Caribbean Cruises Ltd (NYSE:RCL) is a bargain buy with a good outlook for 2015.

RCL Stock: Thanks to a Beating, Royal Caribbean Is a Bargain BuyAfter reporting disappointing fourth-quarter earnings at the end of January, investors sold out of RCL stock, and prices are off nearly 10% since then.

RCL underperformed analysts’ EPS expectations by 22% and even fell short of its own guidance of 35 to 40 cents per share. Also, Royal Caribbean saw revenues decline 2% year-over-year as a result of less on-board spending and missed consensus estimate revenue by 3%.

Still, despite this negative news and subsequent selloff, RCL still is outperforming rival Carnival Corporation (NYSE:CCL), 26% to 20%, over the past six months. And between plans for 2015 that indicate better times for Royal Caribbean, as well as RCL stock trading at a reasonable valuation after this misstep, now seems like a good time to step in and buy RCL.

Let’s take a closer look at what all is making RCL stock look attractive right now.

Hedging Oil Keeps Fuel Costs Down: Royal Caribbean’s underwhelming earnings were caused by a few factors. For one, according to Noelle Knox of CFO Journal: “Falling oil prices boosted Royal Caribbean Cruises Ltd.’s fourth-quarter earnings per share by $0.59, while the rising U.S. dollar wiped out all but 5 cents of that.”

With many predicting an increase in crude oil prices this year, RCL made a strategic decision to lock in the average price of half its oil through 2018.

Royal Caribbean calculated the relationship of the strengthening U.S. dollar and fuel prices and found that at that 50% mark, a natural hedge is created. Over time, this hedging strategy should ensure that any increases in oil prices won’t just crush profitability.

RCL Sees International Success: Royal Caribbean has plenty of international ambition that should see it through 2015.

Royal Caribbean International will take delivery of the ship Anthem of the Seas in the second quarter of 2015. This spring, Royal’s German joint venture, TUI Cruises, will take delivery of its second new ship, Mein Schiff 4. Also, RCL will deliver the ship Celebrity Century to its Chinese joint venture, SkySea Cruises.

Moreover, CFO Jason Liberty said that Royal Caribbean is well-booked for the summer — the primary vacation season — not only in North America, but in Europe as well. ARoyal Caribbean also plans to expand through Southeast Asia after seeing success in China.

Prospects for Increased On-Board Spending: Yes, on-board spending was down 9% year-over-year this quarter, but RCL is working on improving that metric.

Royal Caribbean recently completed deployment of ElevenOS as the Internet management platform for guests for all of its cruise ships. With ElevenOS, RCL is the first in its industry to offer unlimited Internet on a per-day rate. Internet will be faster and more seamless, and guests will be able to choose the level of service that they want to meet their budget.

Advancements to RCL ship Freedom of the Seas also are expected to drive more on-board revenue. The ship’s extra-cost dining option Chops Steakhouse has received a makeover and features a new menu, it has put a new face (Giovanni’s Table) on its Italian restaurant, and it’s opening up a new dining option on the ship, Sabor’s Modern Mexican.

Bottom Line

In addition to all this potential for growth, RCL stock also is trading at the best valuation among the major cruise lines, which include Carnival and Norwegian Cruise Line Holdings Ltd. (NASDAQ:NCLH). Royal Caribbean is trading at 13 times earnings, vs. 14 for CCL and 16 for NCLH.

Investors were too quick to sell RCL stock on the earnings news. Thanks to this combination of value and 2015 tailwinds, Royal Caribbean shows exciting promise for growth in 2015.

As of this writing, Dana Kobilinsky did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/royal-caribbean-cruises-ltd-rcl-stock-buy/.

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