Royal Caribbean COO Explains the Company’s Stock Surge

NEW YORK (TheStreet) -- Royal Caribbean Cruises (RCL) will take delivery of its first new ship since 2010 in the fourth quarter of this year. Coined a "smartship" for its futuristic on-board dining and entertainment experiences, the Quantum of the Seas will represent a key milestone in the company's history.

The only question for investors to ask now -- with a one-year total return of 79%, outperforming that of competitor Norwegian Cruise Line (NCLH) by about 4.5x, and a host of jazzed up new ships set for delivery, is it still smart to buy Royal Caribbean Cruises' stock?

Quantum of the Seas, which cost Royal Caribbean Cruises $1 billion to build, will make her maiden voyage from England to New Jersey in early November before being deployed to the hot China market in May of 2015. Boasting 4,150 berths, 18 decks and 18 restaurants, this mammoth floating island will have a host of industry firsts. Bionic Bar, as it has been named, features two robotic bartenders that take orders from tablet devices and dish out cocktails from their long, metal arms.

"We found that we needed to advance technology on board in multiple different ways", said Royal Caribbean president and CEO Adam Goldstein in an interview with TheStreet

When not enjoying a Jetson's-type dining experience, travelers could enjoy a parachuting session in a skydiving simulator, bumper car matches and views of the ocean from non-balcony staterooms by way of a large LED screen that broadcasts scenes from outside.

Apple (AAPL) may also be jealous of Royal Caribbean Cruises' "smartbracelet" that allows folks to pay for non-included on-board activities and indulgences, such as a women's accessories, with a simple wrist scan -- these magic wrist wands also serve as room keys, too.

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Soon after the delivery of Quantum of the Seas, its sister ship, Anthem of the Seas will arrive, destined for the U.K. market in 2015.  In spite of souring economic conditions in the U.K. and the broader Eurozone, "Europe has been a very favorable environment for us this season", pointed out Goldstein. 

Why these new, lavish ships are so vital to Royal Caribbean Cruises is easy to understand, and fed by the company's ambitious "Double-Double" management initiative unveiled last month that calls for a doubling in EPS by 2017. Royal Caribbean is projected to earn an adjusted $3.49 a share this year per the Bloomberg consensus estimate, with a doubling of earnings by 2017 bringing the company close to $7 a share. Currently, Wall Street expects $6.75 a share from Royal Caribbean Cruises in 2017.

The market has clearly priced in a material upswing in sales and earnings growth from the company, amid more spending per customer on the fleet of smartships, operating efficiencies gained from investments made in design and technology on the new vessels, and ongoing efforts to revitalize older ships. Investors are eager for the tangible financial benefits from a company that, according to Bloomberg data, presently has the lowest trailing-twelve-month net profit margin and return on asset measurement compared to competitors Carnival Corporation (CCL) and Norwegian Cruise Line.

Further, Norwegian Cruise Line is widely credited in the industry as having the youngest, most modern fleet on the high seas. Royal Caribbean Cruises had nine ships out of 33 total between its namesake and Celebrity Cruises brands, coming into 2014 that were delivered prior to 2000. On Sept. 2, the company announced that it would sell one of those pre-2000 delivered ships, the Celebrity Century (delivered in 1995), to Exquisite Marine, a holding company led by Ctrip.com International (CTRP) . The sale will result in a non-cash loss of approximately $20 million.

To circumvent the notoriously competitive ticket pricing environment in U.S. and Caribbean, and partake fully in the strong European and China markets, it's essential that Royal Caribbean Cruises has success with its smartships and that upgraded amenities on older ships are embraced by consumers. From 2011 to 2013, 12 of Royal Caribbean Cruises' namesake ships were revitalized to include upgraded amenities and other features, and two were planned to be refreshed in 2014. Celebrity Cruises "has a vessel revitalization program in order to incorporate well-received concepts from its Solstice-class ships," as mentioned in the company's 2013 annual report.

Nevertheless, memo to land-based hotel operators: It's time to step up the amenity game to compete with the era of smart experience cruising on the open waters.

At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Correction: An earlier version of this story indicated the cost of building the ship Quantum of the Seas as $6 billion. The cost was $1 billion.

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