Rising bunker fuel costs and the recent further devaluation of the British pound are the reasons for William Blair's tempered view. Analyst Sharon Zackfia expects these will combine for an approximate 3-cent reduction in RCL's original guidance.
'Moreover, the impact of the recent further devaluation of the British pound (down 8% since the company reported second-quarter results) will likely result in a downward revision to full year 2016 EPS guidance, as the British pound represents about 30% of the company’s annual foreign currency exposure,' Zackfia said in a note.
Underlying demand, though, remains on target, according to William Blair, with RCL poised to meet its Q3 constant-currency net yield guidance of a 2% increase, including a benefit of approximately 200 basis points from the Pullmantur deconsolidation.
'While we are now in a seasonally slower booking environment, forward pricing remains firm and appears to have strengthened somewhat in recent months with particular strength in the Caribbean,' Zackfia said. RCL has 50% of its capacity in the Caribbean in Q4 compared to 28% in Q3.
As a result, William Blair sees RCL on track to meet its Q4 constant-dollar net yield estimates of a roughly 6% increase, including a lift of about 300 basis points from the Pullmatur deconsolidation. This would translate into full-year net yields at the lower end of guidance of up 4% to 4.5%.
William Blair sees China yields under pressure in the second half of the year due to the big capacity increase in Shanghai, but the brokerage said its pricing checks suggest China fares remain at a 20% to 25% premium versus the average per diem in North America and Europe, with yields further bolstered by above-average on-board spending.
Zackfia identified the 'two major wrinkles' for Royal Caribbean as currency and fuel. The US dollar has strengthened since the company reported earnings in July, while the pound's recent devaluation creates 'even more of a headwind.' William Blair expects the devaluation to cost RCL about 30 cents EPS next year, and fuel another nickel to 10 cents per share. Currency and fuel together are forecast to have an impact of 10 to 15 cents per share in the second half of 2016 and as much as 40 cents in 2017.
William Blair lowered its Q4 EPS estimate 10 cents, to $1.20, up 28% year over year and below the $1.28 consensus and implied guidance of $1.24 to $1.34. The brokerage expects RCL to trim its full-year EPS guidance of $6 to $6.10, versus William Blair's $5.93 and the $6.05 consensus.
For 2017, William Blair now projects $6.60 EPS, up 11% year over year and below the $6.87 consensus, predicated on a 4% net yield increase, including a benefit of 150 basis points from the Pullmantur deconsolidation. Zackfia noted accelerated share repurchases could total as much as $1.5bn, which would add as much as 70 cents per share to EPS for the year.
'While investors may be discouraged by another downward earnings revision on fuel and currency (the stock traded down 6% in early August on a similar revision), the bigger concern on underlying fundamental demand appears largely unfounded to date, based on our price checks,' Zackfia said.
With RCL shares currently trading at 11 times the brokerage's 2017 estimate, Zackfia expects investors to be 'rewarded with double-digit annual EPS growth—notwithstanding currency pressures—with the potential for multiple expansion.' The brokerage reiterated its 'outperform' (buy) rating.
RCL opened at $69.25 Thursday.
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