The Royal Caribbean Group: At full steam ahead

written on January 6, 2021

When in 1988 US President Jimmy Carter attended the christening of the Royal Caribbean cruise ship, Sovereign of the Seas, the vessel was regarded as one of the first megaships to be built. The ship may have since sailed into the sunset, however, it ushered in a new era of cruise vacationing that continues to this day, while it helped the company earn a reputation for being an industry innovator and for designing ships that wow. Based in Miami, Florida and with a market cap as of December 16, 2020 at $16.61 billion, Royal Caribbean is the largest cruise line by revenue and second largest by passenger counts. Operating the four largest passenger ships in the world and visiting some 300 world destinations, the company has been granted more than 100 awards. Now buoyed by the COVID-19 vaccine roll out, Royal Caribbean hopes to move full steam ahead.

A brief history of Royal Caribbean

What was originally known as Royal Caribbean Cruises began to set sail in the high seas in 1968 after a trio of Norwegian shipping companies, namely Anders Wilhelmsen & Company, I.M. Skaugen & Company and Gotaas Larsen merged, following hospitality entrepreneurs Arne Wilhelmsen and Edwin Stephan's idea of offering cruises to the Caribbean to the wealthy living in Florida. In honour of their lineage, the company’s first vessel was named Song of Norway. Featuring a lounge area which the company later incorporated into its other ships, the vessel could carry 700 passengers and weighed 18 tonnes. A year later, the cruise line added the Nordic Prince and a year after that, the Sun Viking. With the passenger industry continuing to grow in earnest, so did Royal Caribbean’s vessels and in 1978, the Song of Norway was renovated extensively, becoming the first ever passenger ship to be lengthened. During the renovation, the ship was cut in half to accommodate an 85-foot middle section which helped add another 164 cabins. Influenced by the state-of-the-art Norwegian marine industry, the company’s first ships were designed with speed and fuel efficiency in mind, featuring shallow drafts that would allow them to berth at small island quays, as well as wide, open-air decks and the round-cantilevered Viking Crown Lounges that became iconic to the Royal Caribbean ships. The following decade the cruise line began making waves by offering resort-style cruising on what was considered megaships at the time by launching the Song of America, which was twice the size of Sun King and the third largest passenger vessel in the world after Song of Norway and Cunard Line’s Queen Elizabeth 2. The new ship enabled Royal Caribbean to expand its itineraries, moving outside of the Caribbean for the very first time and offering cruises to Bermuda from New York. Then, in 1988, it made history with its first Sovereign-class ship, launching the Sovereign of the Seas, which became the largest cruise ship in the world with a passenger capacity of 2,276 individuals and weighing more than 73,000 tonnes. At the same time, it purchased Admiral Cruises, a company that specialised in short cruises. In the 1990s, Royal Caribbean added trips to Europe, Mexico and Alaska, however, the company returned to expanding its fleet, reaching a whole new milestone by building ships specifically for worldwide cruising. By the end of the decade, Monarch of the Seas, Majesty of the Seas, Legend of the Seas, Grandeur of the Seas and Splendour of the Seas were all added to its fleet, while it became the first cruise line to use computer booking. The Voyager of the Seas, in particular, dwarfed all other megaships with its ice rink, rock climbing wall and indoor promenade and was regarded as one of the most innovative ship designs in decades. Experiencing rapid growth, the company built new corporate headquarters in Miami, Florida and it went on to acquire Celebrity Cruises in 1997, changing its name to Royal Caribbean International, with the parent company taking on the name of Royal Caribbean Cruises Ltd. The next decade was marked by a string of refurbishments on its older ships and the shedding of others, while it introduced new classes of vessels, bigger and better than their predecessors with added amenities including water parks and onboard surfing, amongst other things. Weighing 228,081 tonnes, the Symphony of the Seas which debuted in 2018 was named the largest cruise ship in the world, boasting 22 restaurants, 42 bars and lounges, theatres and a nine-storey zip line, amongst other things. Royal Caribbean also operates two privately owned resorts, often used as stops on some of its Caribbean and Bahamas itineraries. One is the Labadee, a resort situated on the northern coast of Haiti which remains till this day a popular port of call for its cruise ship and the other goes by the name of Coco Cay, a private island in the Berry Islands region of the Bahamas. Both resorts are known for sporting eating facilities, palm trees, white sand beaches and a number of activities for young and old alike. From hotel and dining to entertainment, safety, technology and destination development, Royal Caribbean has forged ahead as an industry innovator. As of 2008, the company has close to 25% of the market share in cruise line operation and boasts a number of brands including Royal Caribbean International, Celebrity Cruises, Silversea and Azamara, while it has a 50% ownership stake in a joint venture that operates TUI Cruises and Hapag-Lloyd Cruises.

Fun fact

Former first lady Rosalyn Carter may have been the godmother of the Sovereign of the Seas, however, she is not the only iconic figure to christen a cruise ship. Whoopi Goldberg was first godmother to the Viking Serenade, however, when the ship left service in 2002, the actress picked her godmother status back up by christening the Serenade of the Seas.

When did Royal Caribbean go public?

Royal Caribbean went public in April 1993, offering 10 million shares of common stock priced at $9.00 per share on a post-split basis. Its primary listing is on the New York Stock Exchange (NYSE), however, it also has a secondary listing on the Oslo Stock Exchange (OSE). With the aim to make its shares more accessible to European investors who wouldn’t typically invest through the NYSE, the company chose the Oslo exchange for this purpose and due to the company’s historical links to Norway. The stock has split once so far, undergoing a 2-for-1 split. This means that for each share owned pre-split, a shareholder would now own two shares. Royal Caribbean’s market capitalisation before and after the split took place has remained stable and despite the shareholder now owning more shares, each is valued at a lower price per share. Such a move typically takes place so as to attract a wider range of buyers.

How much would an investment in Royal Caribbean’s IPO would be worth today?

Long considered a market stalwart, until the start of 2020 the Royal Caribbean stock price rose over 1200%, easily beating the market. The company’s shares started the 2010s trading at around $26, making it to $42.18 in early 2011 before selling off down to $15.84 by the end of the year, marking the lowest point of the decade. Then, the stock rallied hard, breaking out to new highs above $50 by 2014 and making it all the way up to $133.99 in early 2020. With extensive cruise options that include the Caribbean, Bahamas, Mexico, the Mediterranean, Asia, South Pacific and North America, its strong positioning as a global brand and the fact that it is the world’s second-largest cruise line operator, it comes as no surprise. However, after an impressive decade, the stock plummeted due to the COVID-19 pandemic. Yet, even after the massive 2020 sell-off, a $1,000 investment in Royal Caribbean stock would be worth more than double today, assuming that all dividends were reinvested.

Is Royal Caribbean stock a buy?

At the onset of the pandemic, a number of the company’s fleet have had confirmed COVID-19 cases. Royal Caribbean’s proactive consideration and quick compliance with the CDC, WHO and public health authorities’ recommendations across the world was praised, yet the pandemic forced the company to suspend all sailings till at least throughout December 2020. Coronavirus fears sent Royal Caribbean shares tumbling down, with the stock dropping as low as $19.25, whereas the pandemic forced the company to cancel 130 sailings during the first quarter of 2020.Then, after news of a potential COVID-19 vaccine broke and following a robust economic stimulus from the Federal Reserve, cruise line stocks have rallied sharply since early November. The market is up over 20% from its historic drop in late March, while the Royal Caribbean stock is up 40% over the last month, more than doubling. Yet, beyond headlines of its stock’s performance, there are other considerations to keep in mind. The company sports a stable balance sheet and a fair history of good fiscal management, while it is positioned in value territory. The company’s revenues rose from about $8.5 billion in 2016 to about $11 billion in 2019, marking its highest annual revenue yet, while it has seen a steady year-over-year increase over the past 20 years. At the same time, the company has hit and at times, even beaten its target Earnings Per Share (EPS) every quarter in 2019. Its earnings also grew sharply over the same period, rising from around $6 per share to about $9 per share.

What’s next for Royal Caribbean?

The company has offered cash refunds, as well as 125% future cruise credits on cancelled cruises. The company’s booking volumes for the remainder of 2020 are, as expected, lower compared to the same time last year, but upon hearing that Pfizer’s vaccine could be more than 90% effective, some people jumped to book cruises. In effect, bookings for 2021 are still within historical ranges when compared to last year. And according to analysts, if the industry is able to make a turnaround, Royal Caribbean is expected to be one of the biggest winners. Not only does it have the healthiest margins in the industry, it also has a strong fan base. Analysts see the company returning to profitability by 2022, with trailing revenue surpassing peak levels by early 2023. And although it will probably take a few years for the stock to double again, the positive prospects could potentially spell a sea of future opportunities for patient investors who can weather any potential risk.

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