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Option Tip – Tuesday, October 25, 2011
RCL Puts



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The Option Tip is to buy Royal Caribbean Cruising Puts before the Earnings Report Creates a Hurricane Fall-out!



RCL logo

RCL puts look good for another post-earnings pullback.

We are now encountering another very busy earnings week, with many S&P 500 companies reporting every day. By looking at past performance reports and reactions encountered afterwards, has helped to bring to light an option tip with a bearish play on Royal Caribbean Cruises (NYSE:RCL).

RCL reports on Thursday before the open, with analysts looking for $1.87 per share, a 14% increase from a year ago. Last quarter, the company missed earnings estimates after seven straight quarterly beats.

RCL cruise ship

Description of Royal Caribbean Cruises

Royal Caribbean Cruises Ltd. (RCL) is a global cruise company operating a fleet of vessels under five cruise brands: Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisieres de France.

The Company currently operates cruises visiting Alaska, the Bahamas, Bermuda, Canada, the Caribbean, Europe, the Far East, Hawaii, Mexico, New England, the Panama Canal, Russia, and Scandinavia.

The Reasoning for the Option Tip

The problem with RCL is its recent performance after reporting. The pattern is a run-up into earnings followed by a decline after the numbers hit the Street.

Last quarter, the stock ran up 6% in the week before reporting, and then dropped 34% in less than two weeks afterward. In April, the shares once again ran up 6% in the week before, traded sideways in the two weeks after, and then fell away. In January, the stock was trading at a six-year high before, then dropped 9% in three days following the report. A pattern has emerged which has generated the idea for this option tip.

Currently, the shares are on a huge run, gaining more than 40% off the October 3 low. But the declining 100-day moving average is now in play as potential resistance. The last time the shares closed a day above the 100-day was in early March.

The Graph for the Option Tip

In the past 52 weeks, shares of Royal Caribbean Cruises have traded between a low of $18.70 and a high of $49.99 and are now at $28.43, which is 52% above that low price. In the last five trading sessions, the 50-day moving average (MA) has climbed 0.5% while the 200-day MA has slid 1.5%.

RCL 102511-graph



Analysts Approach

Sentiment toward RCL is mixed, with seven out of 12 analysts surveyed (58.3%) having a buy rating on Royal Caribbean Cruises. This is below the mean analyst rating of nine competitors, which average 95.2% buy ratings.

Short interest is unremarkable to the point that a short-squeeze is unlikely. So, we see enough optimism to unwind into selling.

Earnings Preview Overview which Impacts the Option Tip

Wall St. Earnings Expectations: The average estimate of analysts is for net income of $1.86 per share, a rise of 13.4% from the company’s actual earnings for the same quarter a year ago. During the past three months, the average estimate has moved down from $2.02. Between one and three months ago, the average estimate moved down. It has been unchanged at $1.86 during the last month. Analysts are projecting profit to rise by 33.8% versus last year to $2.85.

Past Earnings Performance: Last quarter, the company missed estimates by one cent, coming in at profit of 43 cents per share versus a mean estimate of net income of 44 cents per share. In the first quarter, the company beat estimates by 18 cents.

Wall St. Revenue Expectations: On average, analysts predict $2.28 billion in revenue this quarter, a rise of 10.7% from the year ago quarter. Analysts are forecasting total revenue of $7.55 billion for the year, a rise of 11.9% from last year’s revenue of $6.75 billion.

Re-visiting: In the second quarter, profit rose 54.4% to $93.5 million (43 cents a share) from $60.5 million (28 cents a share) the year earlier, but fell short analyst expectations. Revenue rose 10.4% to $1.77 billion from $1.6 billion.

Key Statistics:

The company has enjoyed double-digit year-over-year percentage revenue growth for the past four quarters. Over that span, the company has averaged growth of 12.6%, with the biggest boost coming in the third quarter of the last fiscal year when revenue rose 16.8% from the year earlier quarter.

RCL cruise line

Stock Price Performance: During September 23, 2011 to October 21, 2011, the stock price had risen $5.07 (22.7%) from $22.38 to $27.45. The stock price saw one of its best stretches over the last year between February 3, 2011 and February 11, 2011 when shares rose for seven-straight days, rising 6.3% (+$2.83) over that span. It saw one of its worst periods between May 18, 2011 and May 26, 2011 when shares fell for seven-straight days, falling 7.1% (-$2.88) over that span. Shares are down $19.37 (-41.4%) year to date.

Prediction

Trying to predict how RCL will do in this depressed economy is a tricky business. On one hand, you could argue that high unemployment and a weak economy means less discretionary income available for vacations and recreation. But that’s hardly an insightful or surprising argument, so expectations may be ratcheted lower.

That’s why the option tip is following the past performance fall-backs. The stock tends to run up into earnings and reverse lower after the fact. With a strong rally this month, and potential trendline resistance in play, it is extremely likely that history will repeat itself this quarter as well.

The Option Tip

Buy the RCL Nov 29 Puts for two dollars or less.

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