On July 27, 2023, Royal Caribbean Group's (RCL, Financial) stock experienced a 9.1% gain, despite a Loss Per Share of 4.07. This prompts the question: Is the stock a potential value trap? This article aims to answer this question through a thorough valuation analysis of the company. We invite readers to delve into the following analysis to gain a better understanding of the company's financial standing.
Company Overview
Royal Caribbean Group, the world's second-largest cruise company, operates 64 ships across five global and partner brands. The company's portfolio includes Royal Caribbean International, Celebrity Cruises, and Silversea, with an additional 10 ships on order through 2026. They also have a 50% investment in a joint venture that operates TUI Cruises and Hapag-Lloyd Cruises. The company's stock price currently stands at $110.06, with a market cap of $28.1 billion. However, according to the GF Value, the fair value of the stock is estimated at $160.
Understanding the GF Value
The GF Value is a proprietary measure that represents a stock's intrinsic value. It's calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line on our summary page provides an overview of the stock's fair trading value. If the stock price is significantly above the GF Value Line, it's considered overvalued, and its future return is likely to be poor. Conversely, if the stock price is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus Value calculation, the stock of Royal Caribbean Group (RCL, Financial) is estimated to be a possible value trap. With its current price of $110.06 per share and a market cap of $28.1 billion, investors should think twice before investing in Royal Caribbean Group.
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Financial Strength Analysis
Companies with poor financial strength pose a high risk of permanent capital loss. To avoid this, investors need to review a company's financial strength before purchasing shares. Royal Caribbean Group has a cash-to-debt ratio of 0.06, which ranks worse than 87.1% of companies in the Travel & Leisure industry. The overall financial strength of Royal Caribbean Group is 3 out of 10, indicating poor financial health.
Profitability and Growth
Royal Caribbean Group has been profitable 7 out of the past 10 years. Over the past twelve months, the company had a revenue of $10.7 billion and a Loss Per Share of $4.07. Its operating margin is 3.44%, which ranks worse than 56.6% of companies in the Travel & Leisure industry. The 3-year average annual revenue growth of Royal Caribbean Group is -12.7%, which ranks worse than 71.35% of companies in the Travel & Leisure industry. The 3-year average EBITDA growth rate is -47.8%, which ranks worse than 92.24% of companies in the Travel & Leisure industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Royal Caribbean Group's ROIC was 0.97, while its WACC came in at 11.5.
Is Royal Caribbean Group a Value Trap?
The Altman Z-score for Royal Caribbean Group stands at 0.55, placing the company's financial health in the distress zone and signalling an increased bankruptcy risk. Ideally, an Altman Z-score above 2.99 reflects a safer financial position. The Z-score, particularly relevant for manufacturing companies, considers various factors such as profitability, leverage, liquidity, solvency, and activity ratios. To further understand the Z-score's role in assessing a company's financial risk, please click here. Furthermore, we have observed a decline in the company's revenue. The 5-year revenue per share growth rate stands at -21.4%.
Conclusion
In conclusion, the stock of Royal Caribbean Group (RCL, Financial) is estimated to be a possible value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks worse than 92.24% of companies in the Travel & Leisure industry. To learn more about Royal Caribbean Group stock, you can check out its 30-Year Financials here.
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