RCL 3Q NOT RELEVANT

2013 should be ok but watch out for 2014

RCL reports Q3 on Thursday and we expect a Q3 beat but no change to FY 2013 guidance.  But it's not 2013 we are worried about.  The key question is how much guidance will management provide on FY 2014.  Carnival surprised investors by prematurely providing disappointing revenue yield guidance for 1H 2014 in its F3Q earnings release.  Last October, RCL, without providing numbers, expressed optimism on 2013 booked load factors and average per diems. While it is in management's nature to spin positively, we believe 2014 commentary will be cautious, particularly for the 1st half.  Our recent Cruise Price Survey (published yesterday) certainly indicated that caution is warranted.

3Q and 2013

In late August, Celebrity Millennium cut short its summer season by canceling four Alaska cruises and going into dry dock for four days after multiple propulsion problems.  We think the Celebrity Millennium problems impacted 3Q yields by 0.4% and EPS by four cents.  Including the Celebrity Millennium problems, for 3Q, we forecast 1.8% net yields (constant currency), at the high end of company guidance (+1.0% to +2.0%), and $1.69 EPS (within RCL guidance of $1.60-$1.70). Weak Alaska and China/Japan performance would be offset by strong results from Europe. Onboard and other yields should continue to outperform ticket yields.  

As for 2013, including the impact from Celebrity Millennium, we expect EPS of $2.32 and net yields (constant currency) of 2.5%. 

2014

As we noted in "SHIPS OF STOOLS NO LONGER? (WITH CHARTS)," 2014 pricing may not be as robust as analysts expect.  In particular, Alaska and Europe have been lagging.  Digging in further for Alaska, we're seeing a 50% price discount for the troubled Celebrity Millennium brand for summer Alaska trips, which is dragging down pricing for the rest of the Celebrity fleet as well as the Royal Caribbean brand.  As an aside, Princess (a CCL brand) is usually regarded as the major competitor to Celebrity in the Alaska premium market and based on our survey, their prices have seen substantial gains recently for summer 2014.  In addition, Europe is troubling for RCL as pricing is off by double-digits across the fleet. We're particularly worried about the deteriorating Pullmantur brand, which is struggling in both the Caribbean and Europe markets.  

RCL's cost guidance should be interesting.  In its previous conference call, RCL said it was targeting flat net cruise costs ex fuel for 2014.  Given a very competitive promotional environment in the Caribbean, that would be a worthy feat.  It would be the lowest cost metric growth since 2010.

  

For 2014, we're projecting 1.7% net yield growth (constant currency) and $2.88 in EPS, below Street estimate of 2.5%-3.0% (constant currency) yields and $3.07 EPS, respectively. 

RCL 3Q NOT RELEVANT - RCL2