Royal Caribbean: A Fleeting Respite

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Shares of Royal Caribbean (RCL +0.46%) experienced a rather spirited ascent in January – a 16.4% rally, if one insists on quantifying such ephemeral things. The market, as always, behaves as if possessed by a particularly optimistic poltergeist. One might almost suspect a conspiracy involving retired admirals and a surplus of rum.

The month itself was unremarkable, a dull procession of days, until the January 29th earnings report arrived like an unexpected summons. Revenue, alas, failed to meet expectations – a minor disappointment, easily dismissed. Profits, however, held steady, a predictable outcome. But it was the 2026 guidance that truly captivated the market’s fickle imagination – a promise of future prosperity, delivered with the audacity of a seasoned illusionist. Shares, predictably, leaped upwards in the final days of the month, as if gravity had momentarily lost its grip.

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A Calm Sea, For Now

In the fourth quarter, Royal Caribbean managed to increase revenue by 13.2% to $4.26 billion – a respectable sum, though not quite enough to satisfy the insatiable appetite of the financial gods. Adjusted earnings per share rose a commendable 71.8% to $2.80, meeting analyst estimates with a precision that bordered on the unsettling. One suspects the analysts are merely puppets, dancing to the tune of the market’s whims.

Such growth is impressive, of course. Yet, revenue misses and merely meeting expectations usually elicit a chorus of disapproval, a swift and merciless sell-off. Fortunately, the future, as always, holds more sway than the past. And in this instance, Royal Caribbean delivered a vision of future glory. Management now anticipates adjusted EPS of $17.70 to $18.10 for 2026 – a 14.5% increase at the midpoint, exceeding the expectations of those who dare to forecast such things. A modest triumph, perhaps, but a triumph nonetheless.

CEO Jason Liberty, a man who clearly understands the art of persuasion, assures us the company is on track to achieve its “Project Perfecta” goals – a rather grandiose title, one might add. The plan calls for a 20% annualized EPS growth between 2024 and 2027, with a return on invested capital reaching 17% or higher. While the 2026 guidance falls slightly short of this ambitious target, the two-year average growth rate is projected to reach a respectable 23%. Furthermore, Liberty claims the company’s ROIC has already reached the high teens in 2025 – a feat that would surely impress even the most cynical of observers.

Liberty also noted that 2026 is two-thirds booked at solid rates, and that Royal Caribbean had seven of the best booking weeks in its history since the last earnings call. Needless to say, management was quite optimistic about the picture moving forward. One can almost smell the champagne and hear the faint strains of a celebratory waltz.

A Fortress, But At What Cost?

Royal Caribbean has proven remarkably resilient in the wake of the pandemic, a testament to its superior financial management. Its debt-to-EBITDA ratio remains below 3.0, well within acceptable limits. The company has even begun repurchasing stock, a bold move given the recent turmoil in the cruise industry. It’s as if they are daring fate to intervene.

This success is largely attributable to Royal’s superior adjusted EBITDA margin of 37% over the past 12 months – a full 10 percentage points higher than its competitors. The company’s streamlined portfolio – just three main brands – its investment in private destinations, and its fleet of high-capacity mega-ships all contribute to this impressive performance. A well-oiled machine, perhaps, but one that seems to lack a certain…soul.

Of course, Royal Caribbean trades at a significant premium to its peers, Carnival (CCL +1.81%) and Norwegian Cruise Lines (NCLH +3.81%). Its EV-to-EBITDA ratio of 17.4 is considerably higher than the valuations of its competitors, which hover around 10. Investors are clearly willing to pay a premium for Royal’s higher-quality cash flows. One can only hope they are not being led astray by a mirage.

Carnival and Norwegian may be riskier propositions, but they also offer the potential for greater returns as the industry recovers. However, long-term investors who are bullish on the cruising industry may find Royal Caribbean to be the more attractive option, given its structural advantages and higher-margin business. It is, after all, a fortress built on the shifting sands of public opinion.

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2026-02-10 19:23