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Royal Caribbean appears resilient, despite external factors: Wells Fargo

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RCL 'feels good' about the Caribbean, where Harmony of the Seas, above, begins sailing later this year (Photo: Royal Caribbean)
Royal Caribbean Cruises Ltd.'s business remains more resilient than expected in light of terrorism and geopolitical concerns, and shares have been discounted below levels reasonably justified by current fundamentals. That's the view of Wells Fargo Securities following investor meetings this week in Boston and New York with chairman and ceo Richard Fain and in Toronto with cfo Jason Liberty.

This contrasted with Norwegian Cruise Line Holdings' less robust outlook, particularly for Europe where NCLH reports softer demand from its core North American base. NCLH sources most customers for Europe cruises from North America, while Royal Caribbean draws more Europeans to its Europe ships.

Based on the Royal Caribbean meetings, 'We believe fundamentals [for the North American market] remain strong along with the health of the US consumer,' Wells Fargo analyst Tim Conder said in a note.

Royal Caribbean sources two-thirds of its passengers for European sailings in Europe, and the company is already one-third booked for 2017 Europe itineraries, according to Liberty's comments, as reported by the brokerage.

For Caribbean cruises, the company sources 75% of its passengers from North America, and Royal Caribbean inventory there is more than one-third booked for 2017.

'We believe RCL's forward booked position at higher prices, deployment, asset quality and diversified sourcing/geographic portfolio well position the company to outperform much of the industry over the remainder of 2016 and 2017,' Conder said.

Royal Caribbean 'feels good about the Caribbean' for the second half of 2016 and the second half of 2017, he added, given the cruise operator's booked position and the strong indicated performance of new ship Harmony of the Seas.

Early this week, NCLH issued reduced guidance partly based on what it attributed to over-optimism for Caribbean rates with its two newest, largest ships sailing there year-round.

At the Royal Caribbean investor meetings, management indicated Alaska and Australia are strong while Europe net yields and volumes could be up. China should not necessarily be down in 2017, according to Wells Fargo's take on RCL's business.

Regarding possible mergers and acquisitions, the company could potentially be interested in the luxury sector, but is concerned in the intermediate term that too many new berths could materially pressure the segment. River cruising is interesting, but very volatile and highly dependent on North American travelers, with major operators currently laying up multiple ships, Royal Caribbean management indicated.

Conder 'strongly' reiterated Wells Fargo's 'outperform' (buy) rating for RCL.

Shares opened at $71 Friday.