Coronavirus Fear Threatens Royal Caribbean's Outlook

In narrow-moat Royal Caribbean’s RCL initial prognosis on Feb. 4 on the impact of the coronavirus, it disclosed that it had already canceled eight cruises from China through March 4, costing the company an estimated $0.25 per share. However, as the virus has escalated, Royal has canceled 10 more sailing trips from the region and altered itineraries. The incremental impact from the additional cancellations and changes will cost the business an estimated $0.40 per share, leading to a total impact of $0.65 per share thus far. However, similar to narrow-moat Carnival’s disclosure earlier this week, Royal offered that if it were to cancel all its trips in Asia until the end of April, it could cost the company another $0.55 in EPS. While company guidance for EPS of $10.40-$10.70 excluded any impact, we had already incorporated the $0.25 per share impact into our existing 2020 EPS forecast of $10.19.

All in, the persistence of Covid-19 through April could cost Royal $1.20 per share, or about 11% of its estimated EPS. Furthermore, it would lead to the first year of flat EPS growth for Royal since 2012. More concerning, however, was the statement that recent bookings for its “broader business have also been softer,” suggesting the impact on Royal’s worldwide business has worsened since its earnings report just last week. We remind investors, as we did post-Carnival’s update, that in the years following the SARS (the next year was 2004), H1N1 (2010), and Zika (2017) outbreaks, Carnival and Royal both posted positive as-reported yield growth, conveying the resilience of demand across the industry. If we alter our model to incorporate the full effect of cancellations in Asia through April, our $134 fair value estimate fails to change materially, when we assume 2021 returns to the same yields and costs per diem as prior to the update. As a result, we plan to wait for more clarity on the persistence of the coronavirus before further altering our forward estimates.

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