Hudson Securities Initiates Coverage On Royal Caribbean

Hudson Securities has initiated coverage on Royal Caribbean RCL with a Buy rating and $58 PT. RCL is the second largest global cruise industry player. Its 40 ships and 5 brands represent about one-quarter of global capacity behind industry leader Carnival, who controls about half of global capacity. RCL generates lower net yields and is a less efficient operator relative to CCL, but it is making strides to close the gap. It has 2 new ships on order, which represents about 12% of the industry's order book. With higher operating and financial leverage, RCL's earnings are more volatile than CCL's. Moves in earnings drivers like net yields, fuel costs, and operating expenses have a more dramatic impact on RCL's EPS than CCL's. This makes RCL an excellent was to play the expected strong fundamental recovery in the global cruise industry. RCL has been a net borrower as it used debt to finance its shipbuilding. With the ramp down in capex RCL's cash flow from operations will more than cover its shipbuilding commitments. Hudson expects RCL to generate $400 million and $700 million in excess cash flow in 2011 and 2012, respectively. De-leveraging is RCL's primary focus now with the goal of getting its investment grade rating back. RCL closed Thursday at $47.81