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Wells Fargo picks RCL as a top leisure stock on pricing, premium ships

Wells Fargo picks RCL as a top leisure stock on pricing, premium ships

Wells Fargo Securities singled out Royal Caribbean as its best pick of the cruise stocks and one of its top leisure ideas for 2015 based on pricing trends, new premium ships and international expansion. The brokerage forecast the share price could hit $100 for the first time in 2016.

In a note Wells Fargo cited the pair of new Quantum-class vessels and Quantum of the Seas' China positioning, Celebrity Cruises' strategy and momentum, TUI Cruises' newbuild-fueled acceleration and Royal Caribbean's commitment to double return on invested capital and EPS by 2017.

Wells Fargo analyst Tim Conder thinks RCL’s forward multiples could continue to modestly expand toward 17 times price/earnings and 13 times EV/EBITDA throughout 2015.

The brokerage raised its earnings per share estimates for RCL in 2014 and 2015, while initiating an estimate for 2016, when Conder forecasts the share price could hit $100.

The mix of Oasis-, Solstice- and Quantum-class ships should improve net yields and leverage costs, the analyst said. Plus, he expects a lower cost structure, international expansion and low/mid single digit industry capacity growth through 2016 should benefit operating results, allowing for de-leveraging and modest multiple expansion.

'2014 was the first year RCL began realizing the culmination of multiple initiatives and clearly, investors noticed,' Conder said. 'Assuming no major incremental macro/geopolitical events and on-going management execution, we believe investors will afford RCL modestly higher forward valuations during 2015.'

According to Wells Fargo, Royal Caribbean pricing for remaining fourth quarter bookings has been strong since the beginning of November, with first half 2015 pricing flat ahead of the key North American wave season.

Fuel continues to be a tailwind and foreign exchange a headwind, the brokerage added.

Considering all the factors, Conder said it appears RCL’s current EPS trajectory has 'cushion' to achieve management’s implied $6.90 in 2017. Wells Fargo raised its 2014 EPS estimate to $3.57 from $3.48 and its 2015 EPS estimate to $5.23 from $4.79 and initiated a 2016 forecast of $6.38. This lifts the valuation range to $96 to $100, from $71 to $75, based on the 2016 estimate.

Wells Fargo advised investors to continue building positions in RCL, especially on pullbacks.

RCL opened at $82.97 on Monday.

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