Earnings Preview: Royal Caribbean Cruises

OVERVIEW: Royal Caribbean's shares fell sharply during the quarter as investors anticipated that soaring fuel prices would take a toll on the company's earnings. Royal Caribbean has raised its fuel supplement during the quarter, most recently in mid-June, to contend with the surge.

Meanwhile, the Miami-based company has ordered seven new ships, which are scheduled to enter service by the end of 2010, according to Citigroup analyst Joshua Attie. Oasis of the Seas will be the world's largest, holding 5,400 passengers, when it launches in December 2009.

Key rival Carnival Corp. posted flat earnings in late June due to higher fuel costs, although the results beat Wall Street's expectations.

BY THE NUMBERS: Analysts surveyed by Thomson Financial forecast second-quarter earnings of 40 cents per share on revenue of $1.56 billion.

ANALYST TAKE: Lehman Brothers analyst Felicia Hendrix expects the company's second-quarter net yields to meet expectations but said higher fuel prices may cost the company at least 6 cents in earnings per share compared with guidance. Net yield, a key profitability gauge, is the company's rate of return after subtracting expenses such as taxes. Yields measure net income earned from passengers per day from cruise tickets and onboard sales.

Stifel Nicolaus & Co. analyst Steven Wieczynski, who has a "Buy" rating on the shares, said the company's 2 percent net yield guidance is likely conservative, particularly in light of easy comparisons to last year. He noted that June is a soft booking month. "We believe June bookings were mixed with Europe soft and the Caribbean strong," he said.

WHAT'S AHEAD: Hendrix says analysts and investors will be looking most closely at the company's forecast for the second half of 2008 and any commentary about 2009 bookings. Hendrix, who has assigned Royal Caribbean an "Overweight" rating, said she is "more concerned with net yield growth for the remainder of the year given the increasing difficulties facing the U.S. consumer and the potential impact on cruise demand."

Wieczynski said he believes the six-month booking window "could be shrinking" due to the tough economy.

STOCK PERFORMANCE: Royal Caribbean shares lost more than 30 percent during the period, closing at $22.47 on June 30. During the past 52 weeks, the stock has fallen from a high of $43.96 in December 2007 to a low of $19.16 on July 15.