Solid occupancy trends and higher spending per passenger should allow Royal Caribbean to further leverage fixed costs and offset some of the inflationary pressures from higher fuel, employee-related, and food costs.
The company is implementing a number of energy conservation initiatives and is enhancing the types and sourcing of fuels, and utilizes hedging strategies to lock in fuel prices. It is also restructuring itineraries and has a number of other projects under way to increase fuel efficiency.
While industry-wide demand trends remain favorable, we are also encouraged by the positive impact decelerating capacity growth should have on pricing and occupancy going forward. Royal Caribbean is set to increase its capacity by 5.1 percent in 2008, and an additional 9.3 percent, 11.4 percent, and 6.4 percent in 2009, 2010, and 2011, respectively.
We also find the current valuation compelling. The shares of Royal Caribbean are currently trading at 7.1x our 2008 earnings estimate and at a 35 percent discount to its largest rival. We maintain our Buy rating on the stock. Our six-month target price of $31 for Royal Caribbean is based on a P/E multiple of approximately 11x our 2008 earnings estimate.
POOL May Drain a Little
Pool Corp. (POOL) is unquestionably the leader in the pool industry and has a consistent track record of delivering growth in both revenues and earnings. However, the current operating environment remains challenging and although the company stands to reap substantial benefits when the market eventually improves, we see little in the way of a current catalyst that could justify significant price appreciation in the near term.
The downturn in the housing market, adverse weather conditions in key markets and the negative impact of recently opened sales centers make the company's operating environment challenging. We reiterate our Hold rating on shares and believe that a multiple near the low-end of the company's historic range is appropriate at present.
Pool's business is susceptible to weather changes and the products being discretionary by nature, an economic slowdown could adversely impact operating results. There is somewhat of a correlation between the Pool's business and the new housing construction market. Despite the fact that only 10 percent to 20 percent of new pool installations are related to new construction, a housing market downturn has the potential to negatively impact the share price in the short term.
Shares of POOL currently trade at approximately 14.0x our 2008 EPS estimate of $1.29, and at approximately 11.9x our 2009 EPS estimate of $1.51. Over the last five years, shares of the company have traded at forward P/E multiples between 12x and 29x. Our six-month price target of $19 represents a multiple of 15x our 2008 EPS estimate.
