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Royal Caribbean Cruises Ltd. (NYSE:RCL) is a stock well-positioned for future growth, but many investors are wondering whether its last closing price of $114.84 is based on unrealistic expectations. Below I will be talking through a basic metric which will help answer this question.
Where’s the growth?
According to the analysts covering the company, the following few years should bring about good growth prospects for Royal Caribbean Cruises. Expectations from 18 analysts are bullish with earnings per share estimated to rise from today’s level of $8.782 to $12.087 over the next three years. This indicates an estimated earnings growth rate of 11% per year, on average, which illustrates an optimistic outlook in the near term.
Can RCL’s share price be justified by its earnings growth?
Royal Caribbean Cruises is available at a price-to-earnings ratio of 13.08x, showing us it is undervalued relative to the current US market average of 17.87x , and undervalued based on its latest annual earnings update compared to the Hospitality average of 22.7x .
Royal Caribbean Cruises’s price-to-earnings ratio stands at 13.08x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. However, since Royal Caribbean Cruises is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 13.08x and expected year-on-year earnings growth of 11% give Royal Caribbean Cruises an acceptable PEG ratio of 1.18x. This means that, when we account for Royal Caribbean Cruises’s growth, the stock can be viewed as slightly overvalued , based on the fundamentals.
What this means for you:
RCL’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Are RCL’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has RCL been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of RCL’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.