On April 25, Royal Caribbean(NYSE: RCL) CEO Jason Liberty told investors that the cruise line company was already allowing people to book their cruises for 2026. The statement was simple enough. But it's unusual nevertheless.
For perspective, there is seasonality in the cruise business, with summer being the peak time to go. Therefore, in allowing bookings already, Royal Caribbean is likely already getting things lined up for the summer of 2026 -- a full two years away. That's further out than usual.
Royal Caribbean is allowing this because, simply put, demand is already there. At the start of the year, Liberty pointed out the company had never had a better booked position for both volume and pricing. In other words, Royal Caribbean had already booked more people for cruises at better prices than ever before.
This also means that finding a spot on a Royal Caribbean ship this year is difficult -- it's already filling up. Likewise, bookings for 2025 are also strong. This soaring demand motivated management to open up bookings for 2026 -- a full two years in advance.
This is a good thing, right?
Strong demand and bookings two years in advance is an overwhelmingly good thing. But there is risk that most investors likely haven't thought of.
When Royal Caribbean's customers book a cruise -- or customers of any cruise ship stock, for that matter -- they have to pay some money up front. The company then holds that cash until the cruise happens. This is listed as a liability on its balance sheet.
Why a liability? Well, the money doesn't belong to Royal Caribbean until its customers set sail. And if its customers cancel beforehand, the company needs to return the money. Therefore, it's a liability. As of the first quarter of 2024, it had customer deposits of $6 billion.
There are risks with all investments somewhere. Sometimes investors have to tease out the risks, but they're there. The presence of risk, therefore, isn't intrinsically a problem. Investors just need to properly assess things beforehand and be aware of their own risk tolerance before buying shares.
This related risk acknowledged, times are good for Royal Caribbean right now -- well deserved after the extraordinarily challenging pandemic years. The company's revenue and net income are both at all-time highs. Earnings per share (EPS) still have a little ways to go because the company diluted shareholders during the pandemic. But still, the turnaround has been spectacular.
The good news for Royal Caribbean investors is that they can have reasonable confidence in the business for the next one to two years due to the strong bookings it already has. It's reasonable to expect revenue and profit to stay near highs or make new ones.
Royal Caribbean certainly can use the money. As of Q1, the company has about $7 billion in debt maturities through the end of 2026. It took out debt to stay afloat during the pandemic and has already paid some back down. But it still has a ways to go.
RCL Total Long Term Debt (Quarterly) data by YCharts
Is all of this a green flag?
With investing, balancing pros and cons is a constant necessity, which keeps decisions from being easy. With Royal Caribbean, I feel that it could be in for one of the best stretches in the history of its business. It's great to invest in strength like this.
That said, Royal Caribbean's debt is high, and paying it down remains a focus with its capital-allocation strategy. On top of this, the stock trades at about 22 times its earnings, which is higher than its typical valuation before the pandemic. In other words, it's valued higher than what's typical for a cruise ship stock in good times.
Every investor has to balance the pros and cons individually to see if it works for them. For me, I believe the downside risk with Royal Caribbean stock is somewhat limited because the business is doing so well. But I also believe the upside is limited because of the valuation.
Therefore, this isn't a stock for me. But others may choose to disagree with me on the valuation and buy shares because of the business' strength. And that would also be a rational investing decision.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
