Among the best-performing segments in the market throughout the course of 2018 is the Consumer Discretionary sector. Since the beginning of the year, as measured by the iShares Consumer Discretionary ETF (XLY), the sector is up 12.5%. That includes a pullback of about 9.6% that coincided with the broader market’s correction in late January. The sector has recovered nicely from that point, closing on Friday just a little below an all-time high. The sector’s strong long-term trend, which extends all the way back to 2009, does imply that most stocks in the sector should be seriously over-valued; but one pocket of the sector that actually looks pretty good from a valuation standpoint right now is Leisure & Recreation Services. In particular, Royal Caribbean Cruises Ltd (RCL), which performed remarkably well until January, but hasn’t seen the same kind of push to new all-time highs since then, actually looks undervalued right now. The stock is about 20% below its all-time high price around $136 as of this writing, but looks like it could be setting up nicely, from both a value-based and technical view, for a big push higher.
As the economy continues to show strength, consumer discretionary stocks like RCL could be particularly well-positioned. The stock has an interesting tendency to perform especially well following the summer season; it would seem to be a delayed reaction to increased consumer spending and vacation planning during the summer months. That bodes well for the stock’s short-term performance if you aren’t particularly interested in a longer-term play; but if you don’t mind taking a patient approach, I think there is a much bigger opportunity lying in wait. There are risks, of course; one of the drivers for the stock over the last couple of years has been relatively affordable fuel costs. An increase in oil prices would have a direct effect on RCL’s bottom line. If some analysts fears about oil supply in the wake of renewed U.S. sanctions against Iran are correct, that risk could show up sooner than later. Trade tensions, and the impact they could have on the global economy, could also present a longer-term risk. These are factors that you should take into account against the value and technical information I’m about to present, which looks very favorable.
Fundamental and Value Profile
Royal Caribbean Cruises Ltd. (RCL) is a cruise company. The Company owns and operates three global cruise brands: Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises (Global Brands). The Company also own joint venture interest in the German brand TUI Cruises, interest in the Spanish brand Pullmantur and interest in the Chinese brand SkySea Cruises (collectively, Partner Brands). Together, its Global Brands and its Partner Brands operate a combined total of 50 ships in the cruise vacation industry with an aggregate capacity of approximately 123,270 berths as of December 31, 2016. As of July 31, 2018, the Company’s ships offer a selection of itineraries that call on approximately 540 destinations in 105 countries, covering all seven continents. Royal Caribbean International offers a range of itineraries to the destinations, including Alaska, Asia, Australia, Canada, the Caribbean, the Panama Canal and New Zealand with cruise lengths that range from 2 to 24 nights. RCL has a current market cap of about $23.7 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings and revenues both increased, with earnings growing nearly 33% and sales by about 6.5%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company also operates with a very healthy margin profile, with Net Income running at nearly 20% of Revenues on both a yearly and quarterly basis.
- Free Cash Flow: TRI’s free cash flow is adequate, at $641.39 million. Their total cash and liquid assets in the last quarter was somewhat minimal, at about $109 million. I believe this is a reflection, at least in part, of a deal that was announced in June that the company would acquire a 66.7% majority stake in ultra-luxury line Silverseas Cruises, which is being financed by debt.
- Debt to Equity: TRI has a debt/equity ratio of .68. Their balance sheet indicates their operating profits are more than adequate to repay their debt.
- Dividend: TRI pays an annual dividend of $2.40 per share, which translates to a yield of about 2.11% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TRI is $51.56 and translates to a Price/Book ratio of 2.20 at the stock’s current price. Their historical average Price/Book ratio is 4.06. That suggests the stock is trading at a significant discount right now, with a target price north of $200. I’m not quite that optimistic, since the stock’s all-time high price was reached in January of this year at about $136 per share. However, the stock is current trading about 39% below its historical average, which provides a somewhat more conservative target price in the $158 range. While I would need to see the stock actually break $136 before I would be willing to suggest the stock could reach that level, I do think that both ratios together offer more than enough to reason to argue the stock has a good reason to drive back higher to test that all-time high. That’s a bargain opportunity of 20% alone, which is more than enough reason for a value investor to sit up and take notice.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s intermediate downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock bounced off of trend support at around $101 in early June to push up to its current price. Its initial rebound off of the trend low saw the stock quickly push to around $114 per share before it retested that support in July; that second bounce higher is now providing a nice “double bottom” pattern to look at. Double bottoms are strong technical indicators that a stock is setting for a big bullish push, and is another reason I can see the stock rallying to retest its all-time highs around $136. The breakout that confirms a Double Bottom signal comes when the stock breaks the resistance marked by the most recent pivot high, which was reached in mid-June at around $114 per share, which the stock looks poised to do with any kind of bullish push this week.
- Near-term Keys: If the stock breaks above $114, there could be a nice opportunity to either go ahead and buy the stock outright to hold with a $136 price target in mind if you want to take the long-term, value-oriented approach. If you’re thinking more about a shorter-term trade, there could also be a nice short-term opportunity signaled by that bullish break using call options, with a target price around the $118 – $119 level marked by the 50% Fibonacci retracement line. A bearish trade, either by shorting the stock or using put options, is a very low probability trade right now. The stock would really need to break down below its June low around $101 before any kind of bearish trade should be considered.