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**Royal Caribbean Group** (NYSE:**RCL**) will likely experience a predictable turnaround in its finances over the next year. RCL stock is worth at least 56% more or $122.96 per share. This is based on a wide distribution of novel coronavirus vaccines and safety restrictions that allow more cruises to ramp up.

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It is also reasonably easy to model this out. The company’s fairly stable earnings history over the past three years allows us to do this.

### Earnings Power Forecast

The way to do this is to estimate the company’s earnings power, using its historical earnings, adjusting now for dilution and higher interest.

From 2017 through 2019 Royal Caribbean made the following diluted earnings per share (EPS) from continuing ops: $7.53, $8.56, and $8.95. That averages out to roughly $8 per share.

Now, we also have to adjust for higher dilution and higher interest expenses. Royal Caribbean recently said that it expects interest expenses of $275 million per quarter. That works out to $1.1 billion on an annual run-rate basis. However, compared to 2019, interest was only $408.5 million. That means that going forward there will be $691.5 million in extra interest.

Moreover, the company raised about 3% more shares. Let’s call it 5% to be careful. That brings the total to 220 million shares outstanding going forward. That lowers the baseline earnings power to $7.62 per share.

So, with higher interest, EPS will be $3.14 per share lower (i.e., $691.5 million in extra interest divided by 220 million shares).

That means its earnings power is about $4.48 per share. However, earnings power will rise fairly quickly in the following years as the company pays down its debt.

### Estimating True Value

In addition, we can apply a history multiple to its earnings. According to *Morningstar,* the company sported an average of 19.2 times earnings multiple from 2015 to 2019. Let’s call it 20 times on average.

That means RCL stock is worth $89.60 (i.e., $4.48 in earnings power times 20). That is about 13.7% above current prices. However, keep in mind that earnings power will rise over the next three years as debt is eliminated.

For example, as of Sept. 30, the company had about $17.33 billion in debt, compared to $8.4 billion at the end of 2019. So debt has risen almost $9 billion this year alone.

Let’s also assume Royal Caribbean pays down the debt each year with its earnings. That works out to about $1 billion a year (i.e. $4.50 EPS times 220 million shares). In five years, the company could pay down a significant portion (56%, or $1 billion divided by $9 billion) of the debt. It could probably raise $2 billion or $3 billion in equity at higher prices to pay down most of the rest. That might only result in a 10% dilution (i.e. $2 billion divided by $20 billion market cap).

My point is that the true earnings power will likely be close to 90% of the former $7.62 baseline earnings power, or $6.89. So on average over the next five years, Royal Caribbean’s earnings power is an average of $5.69 per share.

Therefore, at 20 times its adjusted earnings power of $5.69, RCL stock is worth $113.80. That represents a potential gain of 44% over the price of $78.81 per share on Nov. 30.

### What’s Next With RCL Stock

Analysts are not as sanguine about the future value of RCL stock as I am. For example, *TipRanks.com* reports that a survey of 10 analysts has an average target price of $62.22. That is 21% below the Nov. 30 price.

Moreover, *Marketbeat.com* has a similar result. The consensus price target from 20 analysts is $70.12, or 11% below today’s price.

In other words, analysts don’t really believe in the company. I think it is probably pretty easy to write them off. As travel picks up with the widespread distribution of Covid-19 vaccines, price targets will likely rise.

It’s always better to look forward and try and put together a simple model of a company. That is what I have tried to do with this analysis of Royal Caribbean and RCL stock.

We can put a probability estimate on this. Let’s say that there is just a 60% probability company eventually makes its original $7.62 baseline earnings power and is worth $152.40. Commensurate with that there is a 40% chance RCL stock stays flat at $78.81.

The result: its expected value is $122.96. That is seen by multiplying 60% times $152.54 and adding it to 30% times 78.81 (i.e., $91.44 plus $31.52, or $122.96, 56% above the Nov. 30 price).

This shows that RCL stock is worth considerably more than its present price. The idea is to forecast its value yourself and wrap it with a probability estimate. There is considerable upside left in RCL stock.

*On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.*

*Mark Hake runs the **Total Yield Value Guide**which you can review **here**.*

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