Royal Caribbean Shares Get Torpedoed in Rough Earnings Reaction

Royal Caribbean Group (RCL) , formerly known as Royal Caribbean Cruises, released the firm's third quarter financial results on Tuesday morning. The firm reported an adjusted EPS of $5.75 (GAAP EPS: $5.74) on revenue of $5.139 billion. While the bottom-line results actually beat Wall Street by a few cents per share, the top-line number, though up 4.3% year over year, fell short of expectations.

This was not really such a poor quarter. Load factor, numbers of passengers carried and average passenger cruise days all showed year over year improvement. On-board sending and ticket revenue improved as well. Adjusted EBITDA improved too. The problem on Tuesday for these shares was in the guidance. The business is doing well, and the firm has more capacity coming online with the launch of two new ships. Guidance for the full year was increased but did not meet Wall Street consensus.

The CEO 

Royal Caribbean President and CEO Jason Liberty commented in the press release:

"We continue to see strong momentum across our business, powered by accelerated demand, growing loyalty and guest satisfaction that is at all-time highs. Our commercial flywheel — combining innovative ships, distinctive destinations, and world-class brands — continues to drive sustained growth and guests' trust in our ability to deliver the best vacation experiences responsibly." 

Liberty sounded optimistic going forward as well. 

"We are focused on building for the future through innovative ships, a growing portfolio of exclusive destinations, technology, and AI that enhance every step of the guest journey."

Fundamentals 

For the first nine months of the year, RCL has generated operating cash flow of $4.842 billion. Out of that number came capex spending of $3.722 billion, leaving free cash flow of $1.12 billion. Out of that free cash flow came $655 million in the repurchase of common stock for the firm's treasury and cash dividend payments of $552 million to shareholders.

Turning to the balance sheet, RCL ended the period with a cash position of $432 million and inventories of $269 million. That put current asset at $1.887 billion. Current liabilities run at $11.469 billion including customer deposits of $5.604 billion, which is not a true financial obligation but also $3.074 billion in shorter-term debt. That would put the firm's adjusted current ratio at a paltry 0.32, which really is unacceptable. 

Total assets amount to $40.108 billion, of which almost $9 billion is intangible in nature. Total liabilities less equity comes to $29.821 billion. Long-term debt makes up $17.203 billion of that. It is impossible for me to give this balance sheet anything remotely close to a passing grade. This is ugly.

The Chart​

Quite honestly, I do not see RCL as a potential investment with a balance sheet like that. However, this stock could be a vehicle for trade. The stock sold off coming out of a rising wedge as might have been expected. Then, more recently, the shares tried to rally coming out of a falling wedge. 

Tuesday's sell-off ends that attempted rally. I might try to make something out of this beat-down, but not until I see if the 200-day SMA comes under fire. That's where the portfolio managers who did not liquidate on Tuesday morning will have to make a decision.

At the time of publication, Guilfoyle had no positions in any securities mentioned.