ROYAL CARIBBEAN CRUISES LTD (RCL) stock intrinsic value fair value estimate & owner earnings analysis

Royal Caribbean Cruises operates the Royal Caribbean International, Celebrity Cruises and Silversea brands and owns half of TUI Cruises and Hapag-Lloyd Cruises in Germany. About three-quarters of its ticket revenue is booked in the United States. 2025 was the best year in its history: revenue of $17.9 billion, net income of $4.3 billion and $6.5 billion of operating cash flow, with net yields up 3.8%. The first half of 2026 continued the trend, with revenue up 9% and operating cash flow up 10% on the same period a year earlier. How we measure earning power. The business throws off a lot of cash before it buys ships. After removing working-capital timing, stock-based pay, and adding back the interest it pays its lenders, that cash came to about $6.0 billion in 2024 and $6.8 billion in 2025. We take the midpoint, about $6.4 billion, as the starting level. We use only those two years because 2020 to 2022 were shutdown and restart years, 2023 was still recovering, and the fleet before 2020 was materially smaller. The hard part is the spending on ships. Royal Caribbean buys new ships almost every year, so a simple 'owner earnings' figure that subtracts all capital spending swings wildly, from about $9 a share in 2017 (no deliveries) to about $4 in 2025 (two deliveries). Instead of guessing which part is upkeep, we charge every case with the actual contracted ship payments shown in the latest annual report: about $5 billion of total capital spending in 2026, $2.1 billion of ship installments in 2027 and $4.6 billion in 2028, plus about $1.1 billion a year for refurbishments, technology and destinations. From 2029, when no more ships are under contract, we charge about $2.4 billion a year, rising 2% annually, to keep the fleet young and replace ships as they age. That is above the 2025 depreciation charge of $1.7 billion and in line with what the spending outside new-ship deliveries has averaged since the restart. What the growth rests on. In 2025 cash earnings before ship purchases grew about 13%. For 2026 we assume about 6%, below that rate and consistent with the first half. For 2027 to 2029 we credit growth of 5.5% to 6% a year because the ships driving it are already under construction and their financing is committed: the third, fourth and fifth Icon-class ships (2026, 2027, 2028), the seventh Oasis-class ship (2028), an Edge-class ship for Celebrity and the first river ships. Roughly 80% of the cost of the ocean ships is covered by export-credit financing that is already arranged. After 2029 we credit only 1.5% a year, reflecting the company's long record of raising prices per berth, and no new ships. We give no credit to the ten-ship Celebrity River Cruises expansion beyond the first four vessels, to future ship orders not yet signed, or to management's earnings targets. The cases. Base case: the ships on order arrive on schedule, earnings grow as described, and from 2036 the business holds its earning power flat. The business is worth about $97 billion. Net debt at June 30, 2026 was about $22.0 billion ($22.8 billion of borrowings and finance leases, less $0.9 billion of cash), leaving about $75 billion, or $281 a share. Bear case: cruising has deep downturns. In the 2008 to 2010 recession the industry cut prices sharply and Royal Caribbean's profit fell by more than half, and the 2020 shutdown stopped revenue almost completely. The bear case keeps the contracted ships, but in 2028, the year of the heaviest ship payments, cash earnings before ship spending fall 40%. They are still 30% below the 2027 level in 2029 and 15% below in 2030, and then settle permanently 5% below the 2027 level. During the trough the company spends more on ships than it earns, which the committed ship financing and its $6.4 billion revolving credit facility can cover. Interest is still covered more than three times at the bottom. The business is worth about $61 billion, leaving about $39 billion after debt, or $144 a share. Bull case: the same ships arrive, onboard spending and the private-destination program keep lifting yields at about the pre-2020 pace, and growth runs at 7.5% to 8% through the delivery years, then 3.5% a year to 2035 and 1.5% afterward. The business is worth about $150 billion, leaving about $128 billion, or $477 a share. Debt and tax. Royal Caribbean's interest costs about 5% on average and it holds investment-grade ratings, so we make no adjustment for unusually cheap or expensive debt. Borrowings increased by about $1.5 billion in the first half of 2026 as ships were paid for and shares bought back. The company is incorporated in Liberia and most of its shipping income is exempt from U.S. tax. It paid $82 million of tax on $4.4 billion of profit in 2025. All three cases assume this continues. The annual report lists a change in that status as a risk, and a 15% tax would remove roughly $0.6 billion a year. Margin of safety price: $115. We are reasonably sure of the earnings level because two strong post-restart years agree with each other and with the first half of 2026. However, the level is only two years old, and the second quarter of 2026 showed net income slightly below a year earlier even as revenue grew. The worst plausible event is not a recession but a repeat of 2020. That shutdown cost the company $13 billion of losses over three years and forced it to issue shares that diluted owners by about a third. With $22 billion of debt and $9 billion of ship payments still due, a similar event would again cost shareholders heavily, although the ships are hard, financeable assets and the company survived the last one. The things we are most likely to be wrong about are the size and timing of the next downturn, the true cost of keeping the fleet modern once no new ships are on order, and the tax exemption. If all three go against us, the shares look worth around $120 to $140 today. The price assumes a holding period of about five years. Over that time the business should pay a dividend of a few dollars a share a year and buy back stock. From $115 the base case implies roughly a 24% annual return over five years and the bull case far more. The bear case implies a positive, single-digit return rather than a permanent loss, and a single-year recovery from a cyclical low could imply 20% within a short period. Above $115 the bear case implies a loss in real terms on a leveraged, cyclical business. Previous estimates were built on a different basis and are not comparable with these figures.