What a fantastic six months it’s been for Royal Caribbean. Shares of the company have skyrocketed 50.6%, setting a new 52-week high of $342.19. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Royal Caribbean, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Royal Caribbean Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on Royal Caribbean for now. Here are three reasons why we avoid RCL and a stock we'd rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Royal Caribbean’s revenue to rise by 10.1%, a deceleration versus its 71.7% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will face some demand challenges.
2. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Royal Caribbean’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 12.6% for the last 12 months will decrease to 6.8%.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Royal Caribbean’s five-year average ROIC was negative 0.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.
Final Judgment
Royal Caribbean isn’t a terrible business, but it doesn’t pass our bar. After the recent rally, the stock trades at 22.3× forward P/E (or $342.19 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy.
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