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I meant to post earlier that RCL is Value Line Select's pick for January 2000.


- RCL has a 2 for Timeliness, 2 for Technical, 3 for Safety.

- Estimated price 3-5 years out: $70-105/share.

- RCL has about 30-35% of the North American market.

- Its ships are the newest in the industry on average, a competitive advantage.

- New ships on order will bring total capacity to 51,500 pax by end of 2002, an increase of more than 70% from the middle of last year.

- Increased capacity along with expected strength in pricing should help revenues grow at 18% / year over the next 3-5 years.

- Higher margins will result from increased economies of scale as the fleet grows and costs can be spread over a wider base. Operating margins are expected to grow to more than 28% in the next few years, well above the 23-25% of recent years.

- Only about 11% of the North American population has ever cruised, so there is a huge untapped market. On the other hand, those that cruise once (and I can attest to this as a travel agency owner) tend to return over and over.

- RCL's sophisticated yield-management software helps it to manage demand and adjust pricing so as to maximize profits, much as the airlines do.

- Ancillary income sources (shore excursions, gambling, onboard activities like miniature golf, ice skating and rock-wall climbing) add to income (though not to "revenue" - ancillary income is reported "below the line").

- Growth in the fleet is expensive. Cap-ex expenditures of $1.2 bil, $1.4 bil and $1.6 bil, respectively, are expected over the next three years. Financing may come from an available $1 bil credit line, or from secondary debt or equity offerings.

- Risks: RCL uses interest-rate swaps to protect against rising interest rates. However, higher rates may lead to lower discretionary spending by consumers. VL expects this, if it happens, to hurt the smaller cruise operators more, possibly leading to an industry consolidation and eventually giving the larger operators (RCL, CCL, Princess) even more market share.

- Earnings per share are expected to grow at an average annual rate of 27% over the next three years. [Note: using today's closing price of 36 1/2 and the 1999 EPS of $2.16, that gives RCL a PEG ratio of 0.63, which would suggest it's undervalued at these levels.]

(long RCL)
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