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Wells Fargo eyes RCL headwind from fuel, foreign exchange

Wells Fargo eyes RCL headwind from fuel, foreign exchange
With North America itineraries performing well, followed by Asia and then Europe—where the Mediterranean is the most challenged, Royal Caribbean Cruises Ltd.'s core fundamentals 'remain solid and firmly on track' to achieve its projected 2015 profit of $4.45 to $4.65 per share, according to Wells Fargo Securities.

However, the brokerage cautioned fuel and foreign exchange volatility likely mean management will reiterate—not raise—this guidance when reporting second quarter earnings on Thursday, perhaps disappointing investors and producing short-term viability or, a 'buying opportunity.'

Wells Fargo's pricing analysis for North American-sourced passengers indicates strength in Caribbean itineraries for both the Royal Caribbean International and Celebrity Cruises brands. Asia-Pacific follows for the RCI brand, particularly in the second half of the year driven by Quantum of the Seas' deployment from China. Meanwhile, Europe appears the most relatively challenged region, Wells Fargo analyst Tim Conder said in a note, with RCI outperforming Celebrity in the second half.

Currency exchange trends, net of fuel, likely helped Royal Caribbean's second quarter, relative to the company's late April guidance, Wells Fargo said. But this has since reversed, according to the brokerage, creating a headwind net of fuel for the second half, when the cruise operator has the largest exposure.

Royal Caribbean has its largest transactional and translational foreign exchange exposure, 45%, in the third quarter, followed by Q4.

Wells Fargo adjusted its earnings per share estimates, shaving 11 cents and 31 cents from its 2015/2016 estimates, respectively for fuel and foreign exchange. The 2015 estimate goes to $4.77 and 2016 to $5.94. Additionally, the brokerage shifted 7 cents to 8 cents of costs from Q4 to Q3.

Wells Fargo reiterated its 'outperform' (buy) rating for RCL with a valuation range of $94 to $98 based on a 15.8 to 16.5 P/E multiple to its 2016 EPS estimate of $5.94.

Royal Caribbean shares closed at $82.74, down $1.17 on Thursday.