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William Blair sees Q2 upside for RCL but fuel, currency could hold year in check

William Blair sees Q2 upside for RCL but fuel, currency could hold year in check
Citing strong close-in Caribbean bookings more than offsetting Mediterranean weakness, William Blair expects Royal Caribbean's constant currency net yield for the second quarter to be up 2%, ahead of guidance and the consensus of up roughly 1%.

'We expect on-board yields, driven by beverages and Internet, to once again exceed ticket yields,' William Blair analyst Sharon Zackfia said in a note. She thinks constant currency net cruise costs excluding fuel should increase about 2%, in line with guidance.

All told, William Blair projects Royal Caribbean to meet or exceed the brokerage's Q2 earnings per share estimate of $1.05, three cents higher than the consensus and a nickel above guidance of approximately $1. A year ago, RCL made a profit of 84 cents per share.

The company is scheduled to report Q2 results on Aug. 2.

Zackfia thinks trends in the second half will likely improve from Q2. She projects Q3 constant currency net yield will go up 2% to 2.5%, in line with consensus, while Q4 net yield will rise about 3%. This means full-year constant currency yield up about 3.5%, compared to Royal Caribbean's guidance of up 2.5% to 4%.

'We expect second half yields to benefit from increased weightings in the Caribbean and China and less exposure to Latin America, with the fourth quarter likely to outpace the third quarter given less exposure to the Mediterranean and more exposure in the Caribbean,' Zackfia said.

Though China yields are under pressure as sailings go year-round, operators put ships into secondary and tertiary markets and industry capacity doubles in Shanghai, William Blair believes overall demand remains strong, citing many sold-out cruises months before departure.

Despite healthy overall yield trends, the brokerage sees the potential for Royal Caribbean to narrow its EPS outlook to the lower end of prior guidance of $6.15 to $6.35, given an estimated 8-cent hit from higher fuel prices and a stronger dollar in the remainder of the year. William Blair expects RCL's 2016 profit to be $6.16 per share, up 28% from $4.83 in 2015 and below the $6.26 consensus.

The brokerage projects Q3 EPS of $3.31, up 17% and below the $3.42 consensus. That compares to $2.84 a year ago.

For 2017, Zackfia expects RCL's profit to reach $7.20 per share, assuming a constant currency net yield increase of 2.5% to 3%. She thinks the cruise operator will reach investment-grade status in late 2016 and have more than $2bn in free cash flow next year when it could buy back as much as $1.8bn in stock while maintaining investment grade.

This would be about 10% of shares outstanding and add about 90 cents to the brokerage's EPS estimate.

Currently Royal Caribbean is trading at 10 times William Blair's 2017 estimate, below the company's five-year average multiple of roughly 14 times. Zackfia thinks investors will be 'rewarded with approximate 20% annual EPS growth with the potential for multiple expansion as the company executes on its articulated financial goals.'

She rates RCL 'outperform' (buy).

Shares closed at $72.36, up 44 cents, on Thursday.