The Contrarian Blog

Royal Caribbean Struggles to Stay Afloat

by Terri Stridsberg 7/18/2012 9:34 AM
Stocks quoted in this article:
Publication: "Barron's"
Publication title: "Royal Caribbean Cruises to Calmer Waters"
Publication Date: 6/30/2012
Brief Summary:

This article concedes that Royal Caribbean Cruises Ltd. (NYSE:RCL) has had some troubles of late -- namely due to a sluggish economy paired with concerns regarding the Costa Concordia wreck that plagued rival Carnival Corporation (NYSE:CCL). However, the author seems confident that RCL will find itself in recovery mode as soon as next year, even as JPMorgan predicts that "net yield growth will fall" in both the second and third quarters.

So, why would investors set their bullish sails toward the popular cruise concern? According to the article, the optimistic laundry list includes lower fuel costs, stabilized pricing, and the rapidly fading memories of CCL's cruise line disaster. In the longer-term, the article also notes that RCL plans to add fewer ships than in the past, and reduce its capital expenditures, which will likely increase its 2013 earnings and whittle away at its $8.5 billion of debt. Lastly, the author classifies the cruise industry as a largely untapped market in North America, since less than 4% of U.S. and Canadian citizens have embarked on a cruise vacation. That could change, according to some analysts, as baby boomers enter retirement.

Contrarian Takeaway:

From a technical perspective, RCL has little to cheer about, having swallowed a year-over-year loss of almost 30%, and trailing the broader S&P 500 Index (SPX) by more than 5% during the past 60 sessions. On the charts, the stock continues to trade well below its 200-day moving average, which has served as a ceiling since early May. Over the same time frame, the formerly supportive $27 area has also acted as troublesome resistance, and thwarted the equity's rally attempt in late June.

Despite this lackluster performance, RCL remains surrounded by optimism. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day call/put volume ratio of 11.95 for the equity, confirming that traders have bought to open nearly 12 calls for every put during the past two weeks. This ratio ranks in the 92nd percentile of its annual range, indicating that speculators have been picking up calls over puts at a near-annual high pace. Over a broader timeframe, the stock's 50-day call/put volume ratio of 2.73 -- which ranks in the bullishly skewed 74th annual percentile -- signals that calls bought to open have nearly tripled puts during the past few months. This glut of call volume could end up serving as a bearish contrarian indicator, from an Expectational Analysis« standpoint.

Meanwhile, short interest on the cruise concern plummeted by roughly 23% during the past two reporting periods, and now accounts for less than 3% of RCL's available float. The stock's inability to capitalize on this short-covering activity underscores a deep-seated weakness. Plus, it would just two days to cover the remaining bearish bets, at the stock's average pace of trading. In other words, the security is unlikely to benefit from any additional short-covering activity in the near-term.

Although S&P Capital IQ slashed RCL's price-target to $30 from $37 late last week, a considerable number of brokerage firms still have high expectations for RCL. Thomson Reuters pegs the security's average 12-month price target at $32.63, reflecting a hefty premium of 33% to the stock's current price of $24.59. What's more, the equity currently sports six "strong buys" and one "buy" endorsement, compared to six "holds" and nary a "sell" or worse suggestion. This analyst configuration leaves the stock susceptible to additional price-target cuts and/or downgrades, which could further exacerbate its technical woes.

At a time when a large number of people are opting for more affordable "staycations" in lieu of expensive trips -- and given the equity's weak performance on the charts -- a recovery by RCL over the next several months doesn't look like a sure thing. In fact, the company downwardly revised both its second-quarter and full-year guidance back in mid-April after reporting a 40% drop in its first-quarter profit. Essentially, it will likely take some major technical or fundamental muscle before the stock will reach a more stable (and appropriately bullish) shoreline.


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