Royal Caribbean Cruises Ltd. (RCL) shares surged over 3% on Tuesday, even though the company reported mixed third-quarter results. While revenue came in slightly below expectations, adjusted earnings per share (EPS) exceeded analyst estimates. However, investors seemed to focus on the company’s guidance for the fourth quarter, which highlighted potential headwinds.
Revenue for the third quarter grew 17.5% year-over-year, reaching $4.89 billion. This fell short of the consensus estimate of $4.90 billion. On the positive side, adjusted EPS came in at $5.20, exceeding the anticipated $5.03.
The primary area of concern for investors appears to be the company’s fourth-quarter guidance. Royal Caribbean expects net yields to increase by 5.1% to 5.6% in constant currency during the fourth quarter. However, the adjusted EPS guidance of $1.40 to $1.45 falls short of the analyst estimate of $2.28.
Goldman Sachs analyst Lizzie Dove pointed out that the fourth-quarter guidance reflects the impact of Hurricane Milton, which is estimated to have reduced net yield growth by approximately 40 basis points. Dove also anticipates increased cost pressures in the fourth quarter, with year-over-year cost growth projected to be 7.8% to 8.3%, exceeding both Goldman Sachs and Street estimates.
The analyst further explained that the fourth-quarter adjusted EPS guidance incorporates $0.24 of headwinds, with one-third attributed to Hurricane Milton and two-thirds related to the timing of cost shifts from the third quarter and increased non-cash stock compensation. Adjusting for the cost shift from the third quarter diminishes the EPS beat, potentially falling short of investor expectations, according to Dove.
Despite the concerns about the fourth quarter, Dove remains optimistic about the long-term fundamentals of Royal Caribbean. She noted that demand and pricing conditions have improved since the last earnings call, with strong demand anticipated for 2025. As a result, Dove anticipates that long-term estimates for the company will rise, with current 2025 EPS estimates at $14.04, exceeding the Street’s estimate of $13.70.
Investors looking to gain exposure to Royal Caribbean can consider investing in ETFs such as the Defiance Hotel, Airline, and Cruise ETF (CRUZ) and the Invesco Leisure and Entertainment ETF (PEJ).
