While overshadowed by the announcement that its parent company was acquiring Spanish cruise operator Pullmantur for $900 million, Royal Caribbean International's revelation that its third-quarter, closer-in bookings were better than expected in both the Caribbean and Europe was the first good news to come out of the Caribbean this year.

"July and August were clearly more robust than we had been anticipating in both markets," RCI President Adam Goldstein said. "Occupancy ended up higher than we had been expecting. It drove up ticket revenue and onboard revenue." 

The results prompted RCCL to adjust its third-quarter earnings-per-share estimates to $1.60 from $1.49, its full-year earnings-per-share estimates to $2.95 from $2.72 and its fiscal-year 2007 earnings-per-share estimates from $2.48 to $2.59.

It forecasted that its third-quarter net yield would increase about 3% over 2005.

RCCL said it continued to expect full-year net yields to increase in the range of 3% to 4% over 2005, and said it expected earnings to be in the range of $2.90 to $3 per share. Those forecasts excluded any potential impact from the Pullmantur acquisition.

Only a month earlier, RCCL CEO Richard Fain blamed slowness in the Caribbean for dragging down the company's second-quarter profits. At the time, Goldstein said the line was aggressively putting promotions in the marketplace to increase yield.

Mixed reaction

Analysts' reactions to RCCL's third-quarter guidance were mixed.

Glen Reid of Bear Stearns adjusted his estimates for the higher occupancy, ticket prices, and onboard spending reported, and he raised his earnings-per-share estimates slightly in accordance with Royal Caribbean's. However, he did not raise his stock rating from peer perform.

"We believe trends will likely slow," Reid said, "and [full-year 2007] estimate revisions are more likely to be down than up, given fuel prices and macro pressures. We think 2007 estimates are too high."

Tim Conder, an analyst at AG Edwards, said that Wall Street "was modestly too pessimistic with [second-half 2006] estimates" before, and that the results should produce "some near-term strength coupled with short covering. However, pricing concerns into early '07 remain".

"I do feel that RCL low-balled their [third-quarter 2006] guidance at the end of July," he said.  So the recent increase isn't that significant overall."

Jake Balzer of Guzman & Son also said that Wall Street had been too conservative.

"At this point, I really doubt they would have raised guidance unless they were pretty sure they could hit the numbers," he said. "I was above the street and guidance already, so the bump wasn't really a surprise to me."

He also wrote that "given our estimate that the market is approximately 25% undervalued, ... we expect RCL to significantly outperform, and view this as a compelling opportunity."

The Pullmantur acquisition was expected to be neutral or marginally accretive to 2007 earnings. But the debt RCCL was incurring in the deal caused concern among investors.

RCCL said it had signed an agreement with Pullmantur's shareholders to buy all its capital stock for $551 million, plus its net debt of about $346 million.

Fain said in a conference call with investors that the acquisition was being financed by a bridge loan facility -- short-term credit used until a company arranges longer-term financing -- from Morgan Stanley, Goldman Sachs, Citibank and JP Morgan-Chase.

Because of the new debt, Moody's Investors Service changed its outlook on RCCL to stable from positive, Reuters reported.

Standard & Poor said it might cut the cruise line operator's bond rating to junk.

To contact reporter Johanna Jainchill, send e-mail to [email protected].


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