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Stronger euro, lower fuel cost should buoy RCL's Q3: Wm. Blair

Stronger euro, lower fuel cost should buoy RCL's Q3: Wm. Blair
Healthy rates, a stronger euro and lower bunker prices likely will bolster Royal Caribbean Cruises Ltd.'s third quarter, with positive trends accelerating into Q4, William Blair & Co. said in a note.

RCL is scheduled to report Q3 results on Friday.

Analyst Sharon Zackfia expects Royal Caribbean to meet or beat her brokerage's earnings per share estimate of $2.68, up 22% from a year ago and compared to the $2.71 Wall Street consensus and guidance of roughly $2.70.

Zackfia projects constant currency net yields will be up approximately 3.5%, versus guidance of up 3.5% to 4%, reflecting improved trends in the Caribbean against the promotional year-ago period plus continued strengthening in Asia and Europe—apart from softness in the eastern Mediterranean. She thinks net cruise costs excluding fuel could also be lower than guidance of a 1% to 1.5% decline.

William Blair's channel checks found Royal Caribbean's Q3 pricing 'healthy overall' as Caribbean rates continued strengthening while prices for Europe cruises were more volatile. The brokerage expects the company to maintain or narrow full year constant currency net yield guidance of up 2.9% to 3.9%.

'Given that the euro has strengthened by about 3% since management raised full year 2015 EPS guidance in July while bunker prices have fallen roughly 4%, we see the potential for management to narrow or raise full-year EPS guidance of $4.65 to $4.75, versus our estimate of $4.67 and consensus of $4.70,' Zackfia told investors.

Q4 net yields could improve 5% to 6%, she added, reflecting high-yielding ships like Quantum of the Seas in China and, for part of the quarter, Anthem of the Seas in the UK, strong Caribbean yield growth, the lapping of 35 drydock days a year ago for Voyager of the Seas and capacity shifts toward higher-yielding regions, particularly China.

William Blair forecasts Q4 EPS of 95 cents, up from 32 cents a year ago, toward the middle of implied guidance of 91 cents to $1.01 and in line with the consensus.

Zackfia said pricing for 2016 appears solid, and affirmed her forecast of a 3% increase in net yield and EPS of $6.08—3 cents above consensus—as 'achievable.'

RCL shares are up 14% year-to-date, she noted, and are now trading at 15 times William Blair's 2016 EPS estimate. The brokerage continues to see value in the stock, which it rates 'outperform' (buy). Zackia said underlying drivers and articulated financial targets are likely to yield 25%-plus EPS growth over the next few years while steadily improving return on invested capital to the company's targeted double-digit goal.

RCL closed at $93.91, up $2.09, on Monday.