This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!

About Royal Caribbean 

I’ve never been on a cruise but my friend James has.

James is a cool dude that I see basically every other day and we tend to discuss a variety of topics, from politics to good food places in and around Chicago, Illinois, and, of course, being that we are all fully entrenched in the holiday season, we’ve recently discussed what we are planning on doing and where we are planning on individually going, and Florida has been the star of that discussion.

James informed me that a few years back he took a cruise that boarded in The Sunshine State and that he absolutely loved it, and while I don’t remember which specific cruiseliner he used, this lead me to ponder the fact that out of all of the industries and businesses I have written about, I’ve yet to do a deep dive into the cruise industry, which, evidently following the brunt of the COVID-19 pandemic, has been a booming industry, with more and more folks wanting to get out onto the ocean blue and see the world again from the perspective of a moving metropolis that is so large it really ought to have its own zip code.

While cruises (and other forms of travel and lodge) tend to be inordinately expensive during peak season timeframes (think the beginning, the middle and the end of summer, for example, and please detect our humor while you’re at it), you apparently do get a big bang for your buck, with “complimentary” dining and entertainment and, of course, lodging on the ship for the duration of your cruise, not to mention the experiences potentially gained through being dropped off for a few hours at another country’s port, being ingrained in the local culture before getting back on the ship and moving on to the next culture.

It really does sound like a lot of fun and being that we are in the great state of Texas, we are actually home to a popular docking port just south of Houston, in a little island town by the name of Galveston.

Glen Campbell knows exactly what I’m talking about.

At any rate, Royal Caribbean, headquartered where else but in Miami, Florida, is a major cruise operator that makes money by essentially being a hotel on the water, renting out temporary living spaces for defined periods of time and in addition to this core business model, we are just sure there are other charges, fees and “premium” amenities offered to guests as well throughout the duration of their stay.

In considering whether or not this company (or the cruise industry in general) is resistant to inflationary and/or overall recessionary pressures, we sadly don’t deem, at least from what we know about economics and only a bit regarding the cruise industry overall and a company such as Royal Caribbean as being all that during times when consumer budgets are squeezed, as going on a cruise seems to me like quite the discretionary expense, as consumers are far more likely to pay for their gas, water, rent and groceries way before they even think about shelling out nearly a grand to go on a cruise.

And we already know that this industry was incredibly vulnerable to the public onset of COVID-19, which is an inherent, sort of newfound risk, as we personally don’t see COVID being the end of global health emergencies, but merely the beginning, sadly.

Also, the cruise industry is actually quite competitive, as Royal Caribbean goes up against storied luxury cruise operators such as Norwegian Cruise Line, Carnival Corporation, Disney Cruise Line, Viking, and many others. 

An interesting factoid about this company is that it just so happens to own some islands, as well, perhaps acting as a distinct differentiator between itself and the competition.

Prior to delving into the company’s core financial figures and other pieces of data, we also think it is also worth noting that this industry is also very, very, did we mention very expense-heavy, as one ship alone is home to a smorgasbord of fixed, variable, implicit, explicit, direct and indirect costs that eat viciously into one’s bottom-line, however, we won’t hold this against Royal Caribbean too much since this is indeed the nature of the industry in which it operates.

With all of this being said, let’s learn more about Royal Caribbean and its financial foundation.

Royal Caribbean’s stock financials

With a market capitalization of $31.75 billion and a share price of $123.91 with an associated price-to-earnings (P/E) ratio of 40.49 and no present annually distributed dividend offered to its shareholders, Royal Caribbean’s stock (NYSE: RCL) seems to be a bit on the high side, and when we say by a bit, we actually mean by a lot, as the company’s present price-to-earnings ratio largely indicates that the company’s stock is trading at a sizable premium, given how much more elevated it is in comparison to the commonly held fair value benchmark of 20, which isn’t the best of initial signs as we get started, as we definitely are not in the market for buying tops and selling bottoms, oddly enough.Nevertheless, there could be a significant amount of growth driving Royal Caribbean, which could possibly better justify the premium one would seemingly have to pay in order to get a spot on this cruise.

Before moving on, we will mention that given the previously mentioned host of expenses these companies and operators are subjected to, we don’t mind Royal Caribbean not paying out a dividend one bit, as this company (along with its competitors) need to hold onto as much cash as humanly possible.

While still on the subject of cash, according to the company’s balance sheet, Royal Caribbean’s executives are at the helm of just about $33.8 billion in terms of total assets along with around $30.9 billion in terms of total liabilities, which, again, given the nature of the business landscape of cruises and operations thereof, isn’t really all too bad, at least from our vantage point, as this company is still technically total asset-heavy and thus can seemingly sufficiently (try saying that ten times in a row) tend to its outstanding debts and other liabilities while also strapping on a bit more debt (if need be) in the process of further expanding its operations and/or maybe even pursuing new markets and oceanic geographies.

All in all, we feel good, not great about the overall state of Royal Caribbean’s balance sheet.

As it relates to the company’s income statement, the company’s recent annual revenues (specifically referencing since 2018), Royal Caribbean experienced, as expected, a great deal of annual revenue fluctuations during COVID-19, as the company’s annual revenues prior to 2020 hung out around the $10 billion area code, however, proceeded to plummet to $2.2 billion (2020) and as low as $1.5 billion (2021), of course, due to COVID-19 restrictions (again, this company is really, really vulnerable to public health emergencies and threats thereof), however, a sort of silver living can be found in that the company’s revenues in 2022 climbed back up to its more attractive, latest reported figure of $8.8 billion, more than likely being a quantified measure of all of the pent up demand for the company and its services.

This is certainly a positive in itself, however, it’s a bit hard for us to sleep at night knowing that companies within the cruise space are pretty much the furthest thing from being COVID-19-proof, at least in comparison with other large business operators.

According to the company’s cash flow statement, Royal Caribbean absolutely suffered on the basis of net income and total cash from operations during harsher periods of COVID-19, for instance, reporting a loss of -$3.7 billion in total cash from operations during 2020, while, thankfully, those losses have since found themselves back into positive territory, however, an evident pain point for Royal Caribbean is that it is still suffering losses on the net income spectrum, further extending its losses to its most recently reported figure of approximately -$2.1 billion, as reported in 2022.

While it has pared down its net income losses, as its net income in 2020 and 2021 were reported as being as low as -$5 billion during each year, even half of that is still significant and speaks volumes to the cost intensive nature of the cruise industry, and even though Royal’s balance sheet is in good shape, we don’t think it could continue incurring such net income losses if they kept sustaining them at this rate.

Just imagine if another pandemic occurred.

This company could really find itself in some trouble if the rain begins to pour again.

Royal Caribbean’s stock fundamentals

Now, let’s talk a bit about this company from the perspective of profitability and core trailing twelve month (TTM) returns, specifically as they relate to assets and investment(s).

First and foremost, according to TD Ameritrade’s platform, Caribbean’s TTM net profit margin is pegged at 7.02% to the industry’s respective average of 12.35%, which is far from being a net positive, as this company isn’t seemingly on its way to out-profiting the competition (again, on average) anytime in the near future, lagging behind the industry’s respective average by an uncomforting margin, giving us little to no confidence on the short and intermediate-term cash flow prospects of the company.

Regarding the company’s core TTM returns on both assets and investments, Royal Caribbean’s (as also found on TD Ameritrade’s platform), once again, trail the industry’s respective average by notable discrepancies, for instance, with the company’s TTM return on investment listed 3.93% to the industry’s listed, much more impressive average of 17.48%, heavily indicating that this company isn’t being as efficient with its capital as it presumably should be, at least on the basis of comparison with its peers.

Should you buy Royal Caribbean stock?

Given the facts, figures and trends that were unveiled in this stock analysis article, we would personally say no.

There are just too many points of caution, question marks, external vulnerabilities and variables that lead us to just not like this company’s stock (NYSE: RCL) all that much, frankly.

Sure, its balance sheet is in good (once again, not great) shape, its recent annual revenue figures have shown some definitive bounceback, its total cash from operations have remained positive (for the most part), even during peak pandemic years, however, with it still bleeding billions of dollars in cash year-over-year, its poor performing (comparably speaking) TTM net profit margin and return metrics and ratios, plus the fact that the company’s stock is objectively overvalued at the time of this publication, we just aren’t ready to cruise with Royal Caribbean’s stock quite yet.

Therefore, we deem it best to offer this company’s stock (NYSE: RCL) a “sell” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.