Wednesday, July 07, 2010

Royal Caribbean Is Headed for Rough Waters


Royal Caribbean (RCL - commentary - Trade Now) is a high-beta consumer discretionary play that runs cheap cruises for middle-class America. Many consumer names were pummeled in the downturn that began in autumn 2008 as the market priced in the possibility that unemployment would soar and most people would only spend money in the foreseeable future on absolute necessities. Royal Caribbean was not spared its share of pain.

Fortunately, people did not have to live in bunkers for the rest of their lives. In fact, consumer spending bounced back nicely last year. Consumer discretionary stocks went on a wild move up from March 2009 to April 2010. The Consumer Discretionary SPDR (XLY -commentary - Trade Now) was up 119% from the March lows to April 22 this year. Since then, however, that ETF is down 16%.

Royal Caribbean has seen even more violent price action during this period. After bottoming under $6 at the March lows, the stock skyrocketed 484% to the April highs. The biggest reason for its rise was its debt.

Part of Royal Caribbean's large drop during the first economic crisis was due to concerns about its carrying more than $8 billion in debt, a high amount for a company with $7.4 billion in equity. Competitor Carnival(CCL - commentary - Trade Now) is much larger than Royal Caribbean, and it had more than double Royal Caribbean's revenue in the last 12 months ($13.6 billion vs. $6 billion). Yet Carnival's debt is only marginally more than Royal Caribbean's ($9.75 billion vs. $8 billion).

Many investors were concerned that Royal Caribbean would be unable to continue to meet its obligations if consumers stayed away; bankruptcy appeared to be a very real possibility. Even though the company sold itself as a cheap vacation offering, it seemed that most consumers were opting to just stay home. As the stock markets stabilized last year, though, we saw that consumers kept spending. As 2009 rolled on, the company started to have much easier comparisons that have carried into 2010.

Now, though, those comparisons are starting to get more difficult. When the company reports earnings later this month for the second quarter, it will be the first comparison to a quarter after the lows of March 2009. Things will only get tougher in the back half of this year.

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[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

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