Kenneth E. Kuhrt
Executive Vice President
Portfolio Manager, Ariel Fund
As published in the 06/30/23 Ariel Investment Trust Quarterly Report
Founded in 1968, Royal Caribbean Cruises Ltd. (NYSE: RCL) is the second-largest cruise line in the world. The company operates under the Royal Caribbean International, Celebrity Cruises and Silversea Cruises brands as well as through joint ventures with TUI Cruises and Hapag-Lloyd Cruises. Altogether, Royal Caribbean owns 68 ships with total passenger capacity of over 150,000 berths voyaging to approximately 1,000 global destinations. This presence will continue to expand with the pending addition of ten new ships.
Sink or Swim
The COVID-19 pandemic brought the global cruise industry to a standstill. During that time, Royal Caribbean was unable to conduct business in its major markets and the company faced unprecedented headwinds and uncertainty about its future. During the shutdown, Royal Caribbean had nearly zero revenue but still incurred costs to maintain operations and its ships. The management team was adept at leading through this crisis and minimized the dilution to equity holders during the industry’s 15-month shutdown. Once the cruise business was able to resume, the full fleet returned to service with occupancy levels now nearing historical levels.
A Trifecta
These days, the company is experiencing a strong recovery with record sales for cruises in 2023 and 2024, along with all-time highs in onboard spending. Given the strength of its rebound, Royal Caribbean provided the market longer-term guidance through its Trifecta Program, which plots a course to achieve three important financial goals by 2025: triple digit profitability per available passenger cruise days (APCD); double digit earnings per share; and a return on invested capital (ROIC) in the teens. These metrics would have Royal Caribbean operating near historical peak levels, which has been applauded by the market and resulted in its stock rally. Beyond the financial improvements, the company expects to reduce its carbon intensity by double-digit percentages versus 2019 levels.
Refitting the Balance Sheet
Royal Caribbean’s balance sheet was notably stressed during the pandemic shutdown. The market remains nervous about any near-term headwinds that could cause distress. As a result, management been focused on maximizing the company’s free cash flow generation and limiting capital spend. With the guidance under the Trifecta Program and Royal Caribbean’s ability to refinance some of its existing debt, strain on the balance sheet appears to be easing. If the Trifecta Program goals are reached, the company expects to have an investment grade credit profile in 2025.
Weathering the Storm
We believe the market remains overly focused on COVID’s impact on the capital structure of the business and potential economic recession headwinds. Company leadership has steadily managed the business through rough waters, and it has turned a corner for future profitability. In our view, Royal Caribbean remains a compelling investment opportunity and is poised for smoother sailing.
As of June 30, 2023, shares traded at $103.74, a 4% discount to our growing private market value of $108.22.
On this page, we candidly discuss one company to illustrate our investment process. This company is a current holding of certain Funds. The information and our opinions were current as of June 30, 2023 but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. These securities do not represent all securities purchased or sold to investors during the period. Past performance does not guarantee future results. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of any Fund or of any particular Fund itself. Portfolio holdings are subject to change. Click here for the top holdings of the Funds.
