The debate between what a luxury good or service is relative to a normal good or service may seem at first glance to be a rudimentary one. However, such assessment is vital for a consumer related industry where economic conditions will affect how the certain good or service will perform and how corporate profits will shape out quarter after quarter. When examining the production of Royal Caribbean Cruises (RCL), an apparent claim is made that this company provides the service notable for affluent individuals. While such is a seemingly obvious deduction, because of such understanding, and because of such affluence in the global market coupled with a lag factor, companies like Royal Caribbean flourish under these economic conditions.
As obviously understood by its title, Royal Caribbean specializes in the service of providing entertainment to individuals in the form of cruises. In addition, since many of these cruises tend to be high in overall price, business will tend to do its best during times when consumers feel rich and optimistic. Usually such sentiment as provided occurs during times of strong economic growth, low unemployment, and rising wages which, luckily enough, is what the United State's economy is observing right now. While there is some speculation that the economy is slowing because of problems relative to the housing and automobile industry, other economic data, such as the recent monthly jobs posting, indicates that the economy is still incredibly strong and still has strong momentum going into 2007. Such analysis coupled with a lower dollar, strong worldwide economic growth, and increases in imports and money flowing into the US economy absolutely illustrates that a company such as Royal Caribbean, for at least the short term should flourish earnings wise. Furthermore, because Royal Caribbean is a multinational corporation, and currencies in Europe and other developed nations continue to gain strength relative to the dollar, there is a strong potential for tourist activity to increase over the next year, and because of an unusually warm winter, much of such tourist activity will diffuse into services such as provided by Royal Caribbean. To make the situation even more appealing for investors still reluctant to purchase shares of this company, because Royal Caribbean is fairly dependent on the price of oil, with crude oil trading at its lowest levels in years, now, with the strong economic background, depreciating dollar, and global involvement, is the absolute best time to get involved with this company.
While the analysis provided above may seem lucrative and perfect for a company like Royal Caribbean to operate in, without a strong management team who will provide excellent fundamentals, such situation is meaningless. Fortunately for shareholders, the chairman and CEO, Richard Fain, operates a company which has performed extremely well over the past few years. Supporting revenue growth from the previous two fiscal years of 20% and 7% respectively in a chronological sequence coupled with earnings growth of 67% and 50% over the same years, Royal Caribbean continues to grow at a relatively strong rate and should provide reluctant investors with some assurance. Such strong top and bottom line fundamentals have also transcended to the equity side, relative to share price, in a process which illustrates how Royal Caribbean is a value company. With a trailing P/E ratio of about 16, which should decline to near 14 when looking at the next twelve months, relative to the industry's (General Entertainment) P/E ratio of about 26, there is evidence to support such a claim. Even when compared to similar companies who provide the same services, both the trailing and forward P/E ratio of Royal Caribbean are lower to competitor's Carnival Corporation which stands with respective numbers of 18 and 17. In addition, Royal Caribbean has a P/S, Enterprise Value/Revenue, and Enterprise Value/EBIDTA ratio of about 1.8, 2.7, and 10.9 over the past twelve months which are all significantly lower when compared to rival Carnival's respective numbers of 3.5, 4.1, and 13.6. These figures indicate, relative to share price, that Royal Caribbean has performed tremendously well and is undervalued when compared to the rest of the industry. It is true that the PEG is of Royal Caribbean is slightly higher at a five year level when compared to Carnival, but such is only marginal and subjective since the growth of a company has the strong potential to fluctuate during such a large period of time. Nevertheless, the one area that does concern me with Royal Caribbean's fundamentals is its beta and 52 week share price change relative to the S:%$amp;P. With a beta of about 1.75 and a gain of near 10% for the S:%$amp;P in one year, a share price drop of 3.4% during that duration is not too encouraging. However, with a ROE of above 10%, which is higher than the industry's figure, along with the undervalued share price given the strong fundamentals, there should be no problem in 2007, with the strong economic background, for Royal Caribbean to rally and surprise its shareholders with historic highs.
Therefore, because of the strong fundamentals and a perfect economic situation, investors should heed the given indicators and start investing in this company. To provide some simple technical analysis to add some extra cushion, while it's true that Royal Caribbean did not have a stellar year in 2006, it is also true that in late August, on high volume, the share price of this company grew almost 9%. Ever since that day the share price has grown at a steady level with fundamentals that are still too high to what the share price should be now. Thus, on account of all the favorable indicators provided for this company, now would be an excellent time to revisit your portfolio and make the intelligent gesture of purchasing a few shares of this company.
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