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Q2 and Q3 look like beats although we’re not sure management will raise guidance when they report company earnings on Thursday

CALL TO ACTION

RCL will report Q2 earnings this Thursday morning.  We expect a Q2 beat and while Q3 guidance could match consensus estimates, our proprietary pricing survey is suggesting another beat in Q3.  Thus, we remain above the Street for 2014 as a much stronger Europe offsets a still struggling Caribbean market.

ESTIMATES

We expect Q2 net yields (constant-currency) and EPS to be 2.8% and $0.54, respectively, above the consensus EPS estimate of $0.52.  Given what we’ve seen out of Europe on pricing and bookings, we expect Q3 yield guidance of +4-5%, which should be enough to placate the bears.  For Q3, we’re forecasting 4.9% net yield growth and $2.19 in EPS versus the Street EPS estimate of $2.11. 

EUROPE

We usually prefer to focus on sequential pricing trends as YoY pricing indicators are highly volatile and weak in their predicative power in signaling price pivots.  However, we feel it is worthwhile to highlight the rapid ascent RCL has seen in European YoY pricing as this year has progressed.

As seen in the chart from our mid-July pricing survey below, we believe European pricing (as weighted by brand) have averaged 15% YoY growth for Q2 sailings and averaged 10% YoY growth for Q3 sailings.  Q4 pricing is trending close to double digits YoY as well.  Given the strength in bookings, particularly for the RC brand, European yields could be +20% for Q2 and +15% for Q3.  Europe will play a prominent role in Q3 as it accounts for 44% of all RCL sailings, compared with 22% in Q2.  

RCL:  MOMO FROM EUROPE/QUANTUM  - rcl1

QUANTUM OF THE SEAS

This ‘transformational’ ship is getting quite a lot of positive buzz.  In fact, it’s one of the few bright spots in the overcrowded, fiercely competitive Caribbean market.  Agents continue to rave about Quantum, which has held pricing for its winter itineraries since we started tracking in February.  We believe Quantum will easily take over the NJ/NY market for Winter 2014/Spring 2015 Caribbean sailings, at the expense of Norwegian Gem and Breakaway

2015

As we look out to 2015, Quantum’s sister Anthem of the Seas is seeing increased demand for its summer 2015 sailings out of Southhampton.  RCL will need this surge as the company deals with some of the toughest comps and higher capacity in Europe.  China, while an exciting opportunity, will certainly be a wild card in the 2H of 2015.

CONCLUSION

We are encouraged by the sticky pricing driven partially by easy comps in Europe for the RCL brands.  Given the persistently weak pricing in the overcrowded Caribbean market, to which RCL is not immune, we do not believe RCL will raise its previously disclosed FY 2014 net yield guidance of 2-3%. However, RCL will receive a big lift in Q4 Caribbean when Quantum of the Seas hits the market in November 2014.  As we’ve seen multiple times, investors are giddy whenever a media-happy new ship is about to be deployed.