We recently downgraded our rating on Miami-based Royal Caribbean Cruises Ltd. (RCL) from Neutral to Underperform.
The second largest company in the cruise vacation industry was downgraded mainly based on a decline in bookings after the recent sinking of its peer Carnival Corporation’s (CCL) ship and the expected increase in the cost structure. 
We are a bit doubtful about the cruising sector in the near term after Carnival’s ship Costa Concordia ran aground in mid-January on Italy’s west coast. The disaster hit the industry in the wake of the wave season between January and March. The recent tragedy resulted in subdued bookings. Royal Caribbean’s overall booking volumes in North America came down. In Europe, where the incident took place, the cut in bookings has been steeper. Business in APMEA was also down slightly. The company expects a 20% decline in new bookings during the peak of wave season.
The company made some changes related to the international distribution system and shifted some deployment for strategic purposes. This will have a positive impact on yields, but a negative effect on costs. Moreover, investment related to ship revitalization, international expansion and technology investments will drive yield improvements going forward but put pressure on cost structure at the current level.
While Royal Caribbean’s new ships continue to perform well, going forward we expect them to cannibalize existing fleet sales, resulting in pressure on pricing as well as net yields.
Agreement – Estimate Revisions
Based on the above fundamentals, four out of 6 analysts’ estimates moved southward over the last 30 days for the upcoming quarter. For fiscal 2012, all 10 analysts slashed their estimates.
Magnitude – Consensus Estimate Trend
Over the last 30 days, we noticed a drastic decline in estimates, which fell 18 cents for the upcoming quarter and 93 cents for fiscal 2012. The current Zacks Consensus Estimate for the third quarter and fiscal 2012 are pegged at 16 cents and $2.08, respectively.
Royal Caribbean currently retains a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating.


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