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Royal Caribbean
Royal Caribbean
Market cap: $8.7 billion
2009 Revenue: $5.9 billion
P/E ratio: 12.6
Dividend yield: N.A.
Ticker: RCL

After a stormy period, the sailing has lately been -- dare we say it? -- smooth for Royal Caribbean. The cruise company was pounded by the Great Recession, with earnings dipping from $2.68 to 75¢ per share between 2008 and 2009. Now leisure spending is recovering, and Royal Caribbean is benefiting from the fact that cruises have always cost less than comparable land vacations. The company's earnings are on pace to rise 168% in 2010. By comparison, operating earnings at Disney's theme parks and resorts fell 7% during Walt Disney Co.'s fiscal year that ended Oct. 2.

The recovery in vacation spending has been stronger in Europe than in the U.S., but that hasn't been a hindrance for Royal. "A hotel builder makes a big capital commitment and hopes that the geography works. If it doesn't, they're in big trouble," says Ken Kuhrt, an analyst and fund manager at Ariel Investments, which owns 2.5 million RCL shares. "Royal Caribbean simply comes up with new itineraries and moves its assets to wherever they're going to get the greatest return." By 2012, 50% of the cruise line's passengers will be international, according to William Blair analyst Sharon Zackfia, up from 25% five years ago.

Based on current bookings and the early success of its new Oasis of the Seas cruise ship (and her just-launched sister, Allure of the Seas), Royal Caribbean has said it expects 2011 earnings to surpass its previous record of $3.26 a share, which would mean profit growth next year of at least 62%. The two new ships boast 5,400 rooms -- vs. 3,600 for rival Carnival's biggest vessel -- as well as zip lines, water parks, and 3-D movie theaters. "People are willing to pay a premium to be on these new ships," says Kuhrt. "They're assets nobody else has -- it would take three years if somebody wanted to build a comparable ship."

The stock, now $40 a share, is trading at a modest 13 times 2011 earnings, but Kuhrt thinks it deserves a P/E closer to 17, which was Royal Caribbean's average valuation from 1997 to 2007. That translates to a stock price of $54 -- just the sort of gain that could fund a pleasant holiday.



NEXT: Entropic
Last updated December 20 2010: 2:27 PM ET
All stock prices as of Nov. 30; price/earnings ratios based on estimated 2011 earnings.
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