Royal Caribbean shares slip 20% from peak as fuel costs squeeze margins
The largest cruise line by market capitalisation faces pressure from rising oil prices and geopolitical tensions, yet has raised its full-year earnings guidance.
Royal Caribbean Cruises, the largest cruise operator by market capitalisation, has seen its share price fall 20 per cent from its 52-week high. The correction marks a notable shift for a company that previously led the post-pandemic recovery in the travel sector, becoming the first major cruise line to achieve full-year profitability in 2023 and reinstate its quarterly dividend.
The decline is attributed to an 11 per cent jump in operating expenses, driven primarily by higher fuel prices and rising food and labour costs. These factors have contracted margins, resulting in the first decline in adjusted earnings since the company returned to profitability. Revenue for the latest quarter rose by a modest six per cent, representing the second-weakest top-line growth since operations resumed five years ago.
Geopolitical tensions have further complicated the outlook. While the majority of Royal Caribbean’s sailings take place in the Caribbean, far from the contentious Strait of Hormuz, safety concerns linked to the war with Iran have introduced a deterrent to bookings. The rise in oil prices, a significant cost component for sailings, remains the most substantial financial headwind for the business.
Despite the quarterly dip, the company raised its earnings guidance following the report. Royal Caribbean forecasts that full-year revenue will climb by nine per cent, with adjusted earnings per share targeted at a 14 per cent increase at the midpoint of its guidance range of $17.73 to $17.87. Bookings for the following year remain ahead of historical levels, indicating sustained demand.
The stock currently trades at 16 times the midpoint of this year’s adjusted earnings guidance, with a dividend yield of 1.7 per cent. Trailing revenue is up 71 per cent from its pre-pandemic 2019 peak, and net income has more than tripled. Although the stock is down 14 per cent over the past year, this performance is considered an outperformance compared to double-digit drops seen in other major cruise operators.
The broader cruise industry is experiencing similar pressures, with all three largest players sporting double-digit percentage declines over the past year. However, Royal Caribbean’s fundamentals remain strong, with the company poised for a seasonally strong third quarter.
