Royal Caribbean Cruises Ltd (NYSE:RCL) stock has been on a remarkable run over the last year. Shares of the cruise company had roared more than 50% higher through last Friday as earnings experienced some significant tailwinds due to the global meltdown in energy prices.
Fellow cruise operators Carnival Corp (NYSE:CCL) and Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) also crushed the S&P 500 over the last year for the same reason, with CCL stock up 25% and NCLH stock up an incredible 67% in the last year.
Those days are, most likely, over.
Disappointing Guidance From RCL
RCL stock lost as much as 9% in early trading on Friday. Despite beating first-quarter earnings estimates, Royal Caribbean’s revenues were slightly below consensus forecasts. EPS clocked in at 20 cents against Wall Street estimates of 14 cents. Revenue was $1.82 billion against expectations of $1.83 billion.
But the real kicker, the unforgivable part of Royal Caribbean’s most recent report, was its forward earnings guidance, which it reduced sharply. The strengthening U.S. dollar and a rebound in fuel prices since the time it last gave guidance in January caused RCL to reduce its second-quarter EPS expectations to 70 cents, 35% below the $1.08 per share that Wall Street expected prior to the announcement.
RCL stock also will face pressure for the rest of 2015, as the company reduced full-year EPS estimates to the $4.45-$4.65 range, a reduction of 20 cents, though it admitted the combined effect of higher fuel costs and a surging dollar could hit EPS to the tune of 36 cents over the course of the year.
Since the time Royal Caribbean last gave guidance, on Jan. 29, the price per barrel of crude oil has soared more than 20%.
Applying the stock’s current 21 price-to-earnings multiple to the precipitous fall in the RCL stock price today, the market is pricing in a 30-cent hit to earnings in 2015.
As for the strong dollar: Royal Caribbean, which operates cruises in China and Europe and other overseas locations, feels the pain of a strong dollar as foreign guests spend less on a dollar-denominated basis once they’re onboard, as onboard sales are booked in greenbacks.
RCL estimates that a mere 10% rise in its average fuel prices costs the company $22.7 million. There’s a simple way to make Royal Caribbean’s results less volatile and more predictable: hedge more. The company currently only hedges 58% of its estimated 2015 fuel requirements, meaning that RCL will either realize savings or incur greater costs on the remaining 42%, depending on what fuel prices do.
With no indication Royal Caribbean is seriously considering increasing its hedging — and no reason to believe the strength of the U.S. dollar will abate anytime soon — investors should remember that there are always more fish in the sea.
RCL stock has had its run. But all good things must come to an end, and the end is near with this play.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at email@example.com.
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