Cruise vacation company Royal Caribbean (NYSE:RCL) met Wall Street’s revenue expectations in Q4 CY2024, with sales up 12.9% year on year to $3.76 billion. Its non-GAAP profit of $1.63 per share was 9% above analysts’ consensus estimates.

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"2024 was exceptional, thanks to our incredible team's flawless execution, which drove elevated demand across our leading brands, the early achievement of our Trifecta goals, and meaningful progress on our strategic priorities," said Jason Liberty, president and CEO, Royal Caribbean Group.

Company Overview

Established in 1968, Royal Caribbean Cruises (NYSE:RCL) is a global cruise vacation company renowned for its innovative and exciting cruise experiences.

Travel and Vacation Providers

Airlines, hotels, resorts, and cruise line companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted from buying "things" (wasteful) to buying "experiences" (memorable). In addition, the internet has introduced new ways of approaching leisure and lodging such as booking homes and longer-term accommodations. Traditional airlines, hotel, resorts, and cruise line companies must innovate to stay relevant in a market rife with innovation.

Sales Growth

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Royal Caribbean grew its sales at a sluggish 8.5% compounded annual growth rate. This fell short of our benchmark for the consumer discretionary sector and is a poor baseline for our analysis.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new property or trend. Royal Caribbean’s annualized revenue growth of 36.6% over the last two years is above its five-year trend, suggesting its demand recently accelerated. Note that COVID hurt Royal Caribbean’s business in 2020 and part of 2021, and it bounced back in a big way thereafter.

We can dig further into the company’s revenue dynamics by analyzing its number of passenger cruise days, which reached 13.68 million in the latest quarter. Over the last two years, Royal Caribbean’s passenger cruise days averaged 35.1% year-on-year growth. Because this number aligns with its revenue growth during the same period, we can see the company’s monetization was fairly consistent.

This quarter, Royal Caribbean’s year-on-year revenue growth was 12.9%, and its $3.76 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 9.2% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

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Cash Is King

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Royal Caribbean has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 8.5%, subpar for a consumer discretionary business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Royal Caribbean to make large cash investments in working capital and capital expenditures.

Royal Caribbean’s free cash flow clocked in at $915 million in Q4, equivalent to a 24.3% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

Key Takeaways from Royal Caribbean’s Q4 Results

It was great to see Royal Caribbean’s positive EPS guidance for next quarter, which exceeded analysts’ expectations. We were also happy its EPS outperformed Wall Street’s estimates despite in line revenue. Overall, this quarter had some key positives. The stock traded up 3.4% to $244.88 immediately after reporting.

Indeed, Royal Caribbean had a rock-solid quarterly earnings result, but is this stock a good investment here? We think that the latest quarter is just one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.