Celebrity River Cruises And Private Destinations Will Open New Markets

Key Takeaways

• Expansion into river cruising and private destinations aims to capture market share, enhance guest experiences, and boost revenue with high-margin opportunities.
  
• New ships, digital enhancements, and AI-driven personalization are poised to drive capacity growth and improve profitability through optimized bookings.
  
• Expansion into new ventures like river cruises and increased capital expenditure could strain financial resources and risk returns without guaranteed financial success.

Catalysts

Operates as a cruise company worldwide.

• The expansion into the river cruising market with Celebrity River Cruises, expected to begin in 2027, aims to capture substantial market share in a fragmented industry. This initiative is anticipated to provide high-margin, high return on invested capital business opportunities, potentially boosting future net margins and revenue streams.
  
• The introduction of new ships and private destinations, including Star of the Seas and Celebrity Xcel, along with enhanced digital capabilities, are positioned to drive moderate capacity and yield growth. These efforts are expected to improve overall profitability and elevate earnings through increased booking and pricing optimization strategies.
  
• The company's focus on expanding private destinations such as Perfect Day Mexico and new beach clubs are anticipated to enhance guest experiences and drive higher revenue per passenger day while maintaining strong cost control measures, contributing positively to net margins.
  
• Enhanced use of technology, including digital platforms and AI-driven personalization, is set to improve consumer engagement and booking efficiencies. This adoption could result in higher revenue and margins by increasing onboard and pre-cruise spending while reducing operational costs.
  
• Continued major investments in the private destination portfolio, as well as the resumption of the modernization program for existing ships, are expected to drive future growth. These investments are aimed at enhancing guest satisfaction and loyalty, potentially leading to increased revenue and sustainable financial performance improvements.

Royal Caribbean Cruises Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Royal Caribbean Cruises compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Royal Caribbean Cruises's revenue will grow by 7.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 17.5% today to 26.1% in 3 years time.
• The bearish analysts expect earnings to reach $5.3 billion (and earnings per share of $18.85) by about April 2028, up from $2.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.6x on those 2028 earnings, down from 18.1x today. This future PE is lower than the current PE for the US Hospitality industry at 22.7x.
• Analysts expect the number of shares outstanding to grow by 4.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.58%, as per the Simply Wall St company report.

Royal Caribbean Cruises Future Earnings Per Share Growth

Risks

• The expansion into river cruises, while promising, involves substantial capital investment in ships and berthing rights, which could strain liquidity and impact net margins if the venture does not meet financial expectations.
  
• The expected strong demand from North America, which accounts for about 80% of guests, may be vulnerable to economic downturns or changes in consumer behavior, potentially affecting revenue and earnings.
  
• The substantial increase in planned capital expenditure, including $1.6 billion in non-ship capital for private destinations, could strain cash flows and pose risks if these projects do not deliver the expected returns on investment.
  
• Exposure to foreign exchange and fuel price fluctuations poses a risk, as the earnings guidance includes a $0.65 per share headwind from these factors, which could further impact net earnings if such conditions persist or worsen.
  
• The new initiatives and technology integrations bear execution risks, as the success of digital and AI-driven capabilities in enhancing customer experience and achieving forecasted growth in revenue and yield is not guaranteed.

Valuation

• The assumed bearish price target for Royal Caribbean Cruises is $238.5, which represents one standard deviation below the consensus price target of $273.94. This valuation is based on what can be assumed as the expectations of Royal Caribbean Cruises's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $330.0, and the most bearish reporting a price target of just $185.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $20.4 billion, earnings will come to $5.3 billion, and it would be trading on a PE ratio of 17.6x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $193.37, the bearish analyst price target of $238.5 is 18.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.