Miami-based Royal Caribbean Cruises Ltd. (RCL - Get Rating) owns three global cruise vacation brands that include Royal Caribbean International, Celebrity Cruises, and Silversea Cruises. Its stock has declined 33.2% in price over the past six months and 27.2% over the past month. RCL plunged to its 52-week low yesterday, falling as much as 8% intraday to close the trading session at $64.27. The stock has a 2.62 beta, indicating high volatility.

The newly identified omicron strain of COVID-19 is prompting fears of renewed lockdowns. The World Health Organization has designated the new variant as a ‘variant of concern,’ advising countries to consider imposing new restrictions and banning international travel. This threatens the cruise line’s recovery. Also, it is not yet clear whether the current vaccines will be effective against the variant. Recently, Moderna Inc. (MRNA) CEO expressed concerns about the possibility of a ‘material drop’ in the effectiveness of existing vaccines against the new variant. If the omicron variant drives another COVID-19 wave, or the vaccines fail against the strain, it could adversely affect RCL and the cruise industry’s recovery.

Even though Emer Cooke, executive director of the European Medicines Agency, has attempted to reassure the world, stating that “even if the new variant becomes more widespread, the vaccines we have will continue to provide protection,” uncertainty persists.

Here is what could shape RCL’s performance in the near term:

Weak Bottom Line

RCL’s total revenues increased 1,456.4% year-over-year to $456.96 million in its fiscal third quarter ended September 30. However, its revenues missed the $618.49 million consensus estimate by 26.1%. RCL’s operating loss stood at $1.00 billion, up marginally from the same period last year. Its net loss attributable to RCL grew 5.8% from its  year-ago value to $1.42 billion. The company’s adjusted loss per share came in at $4.91, versus a $4.40 consensus estimate, reflecting an earnings surprise of negative 11.6%. Also, its trailing-12-months net operating cash flow and levered cash flow were negative $2.50 billion and $2.92 billion, respectively.

Poor Profitability

RCL’s negative 199.45% gross profit margin is substantially lower than the 35.79% industry average. And RCL’s negative 71.24%, 16.13%, and 8.04% respective ROE, ROA, and ROTC compare with the 17.28%, 6.09%, and 7.81% industry averages.

Lofty Valuation

In terms of forward EV/Sales, RCL is currently trading at 21.00x, which is 1,373.9% higher than the 1.42x industry average. And its 9.54 forward Price/Sales ratio is 737.4% higher than the 1.14 industry average.

POWR Ratings Reflect This Bleak Prospects

RCL has an overall F rating, which translates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Quality, which is consistent with its lower-than-industry profit margins.

RCL has an F grade for Stability, in sync with its high beta.

Of the four stocks in the F-rated Travel – Cruises industry, RCL is ranked #2.

Beyond what I have stated above, one can also view RCL’s grades for Sentiment, Growth, Momentum, and Value here.

Bottom Line

The cruise line companies have been recovering gradually with increasing demand and the easing of travel restrictions. However, the newly identified COVID-19 variant is threatening the industry’s recovery. Analysts expect RCL’s revenue to decline 22% in the current year and its EPS to remain negative. Also, considering the stock’s bleak profit margins and high volatility, we think the stock is best avoided now.

RCL shares were trading at $66.86 per share on Thursday morning, up $2.59 (+4.03%). Year-to-date, RCL has declined -10.48%, versus a 22.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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