NEW YORK (TheStreet) -- The seas may be starting to part for long-term investors looking to come aboard Royal Caribbean Cruises' (RCL) shares, that is if the second-quarter financials are any indication of what lies ahead.
In an interview with the TheStreet, Royal Caribbean Cruises chairman and CEO Richard Fain noted that what investors witnessed financially in the second quarter was partially a byproduct of a "$1 billion" fleet-modernization initiative called the Royal Advantage that set sail "two and a half years ago."
In the second quarter ended June 30, Royal Caribbean crushed Wall Street's earnings per share expectations by $0.13 on an adjusted basis, sending the stock zooming close to 8% by midday trading. Total revenue at $1.98 billion came in line with consensus forecasts, but undoubtedly the bottom line was the true standout of the quarter. Royal Caribbean's profits benefited from a strong close in booking trends for Europe and China, which alleviated continued competitive ticket pricing in the Caribbean.
Royal Caribbean Cruises, at a market cap of $13.49 billion, is the second largest cruise ship operator based on that measure compared to Carnival Corporation (CCL) ($28.19 billion) and Norwegian Cruise Line (NCLH) ($6.61 billion). Although the company is number two in market cap, it's stock has been the best-performing amongst its peer group over past three and six months.
In the last three months, shares have gained 7.99% vs. a 3% drop for Carnival Corporation and a 4.68% rise for Norwegian Cruise Line. Expanding out to six months, Royal Caribbean's stock is the only one to have increased, to the tune of 13.55%; Carnival Corporation shares have fallen 11.76% and Norwegian Cruise Line has shed 12.18%.
According to Bloomberg data, Royal Caribbean has the lowest net profit margin and return on asset metrics relative to its aforementioned peers, at 5.34% and 2.12%, respectively. The stock's recent price appreciation may represent an early indication that some investors see the company closing the gap with competitors on net profit margins and returns. The second-quarter results went a long way to advance that notion.
Royal Caribbean Cruises not only has four new ships under its namesake brand being delivered from the fourth quarter of 2014 through the second quarter of 2016. Those will assist in boosting capacity an impressive 23% by December 2016. However the company's fleet revitalization efforts, including enhanced culinary and retail experiences, will propel lucrative on-board revenue. In the most recent quarter, Royal Caribbean Cruises on-board revenue increased 1.7%, and are up a solid 2.9% year to date.
"Culinary has been a huge growth area", remarked Fain. But, the upgrading of the cruising experience hasn't stopped with new culinary options, it has even included enhancing the casino. "We have included more private rooms for high rollers", said Fain, which projects a more "upscale experience." When asked if the casino has done increased levels of business following the upgrades, Fain pointed out "they seem to be doing better."
Another nugget to enriching the on-board experience? The addition of virtual balconies, which according to Royal Caribbean Cruises "display expansive, real-time views of the ocean and destinations" via an 80' high definition television screen.
These fundamental changes to the company, as well as sending the the new ships to Shanghai in 2015 to tap into robust demand for cruises and amenities in China, suggests competitive ticket pricing in the key Caribbean market will be less of an anchor on the financial statements going forward. Fain did not disclose the retail brands that will appear on the new fleet, dubbed the Quantum of the Seas, but stressed they will be "some really marquee brands."
Just as Royal Caribbean Cruises will have increased its capacity some 23% by December 2016, its capital expenditures will peak at $2.2 billion as investments to launch new ships and to revitalize one of the oldest fleets in the industry (Norwegian Cruise Line credited with the youngest fleet; the oldest ship in service for Royal Caribbean Cruises dates back to 1992, Norwegian Cruise Line 1998) head into the rearview mirror. Capital expenditures are projected by the company to nosedive to $300 million in 2017.
The read by savvy investors at the moment is that Royal Caribbean Cruises will be floating ships with a greater number of berths and an even more luxurious on-board environment, while costs fall compared to the heavier investment years from 2014 to 2016. Hence, profit growth starts to accelerate.
The risks, of course, to the sunnier outlook for a Royal Caribbean Cruises is a general uptrend in fuel expenditures, ticket price discounting in the important Caribbean market that fails to stabilize in 2015, and yawning industry capacity in China leading to newfound trouble commanding the premium prices the stock market is bracing for today.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.