Royal Caribbean Downgraded

We recently downgraded our rating on Miami-based Royal Caribbean Cruises Ltd. (RCL - Analyst Report) from Outperform to Neutral. The second largest cruise company operating 38 ships in the cruise vacation industry was downgraded on a host of factors including concern over cruise activity in Spain, sluggish on-board revenue for the remainder of the year as well as rising food costs.

Management remains less hopeful on cruise activity in Spain as recession in that country is showing no sign of a near-term turnaround. However, management in Spain has been proactive in finding ways to minimize the recessionary impact. In fact, Royal’s closest peer Carnival Corporation (CCL - Analyst Report) also remains apprehensive about lower Caribbean pricing in the first quarter of 2011, due to the significant supply increases in that market.

The company does not expect a huge uptick in onboard revenue for the remainder of the year. Food and other costs are also heading up although management expects these to be manageable in 2011.

While the company’s new ships Oasis and Allure of the Seas continue to perform well, going forward we expect them to cannibalize existing fleet sales resulting in pricing pressure as well as net yields.

However, the holiday season is likely to act as a key driver of the stock in its ongoing fourth quarter. With a gradual economic resurgence, the company is also witnessing encouraging booking and pricing momentum.

In our opinion, however, much of the positive news in Royal Caribbean stock has been reflected in the current level and we wait for a better entry point.

The company is scheduled to release its fourth quarter 2010 earnings on January 26, 2011, while Carnival Corporation will declare its financial results for the same quarter on December 21, 2010.

Royal Caribbean currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.