Jefferies Upgrades Royal Caribbean, but Sandals Is No Quick Earnings Lift

Jefferies upgraded Royal Caribbean Group to “buy” on Thursday while cutting its 2027 earnings forecast. That combination deserves more attention than the rating change alone.

The bank expects Royal Caribbean’s planned Sandals investment to contribute $159 million in equity investment income in 2027. Yet higher depreciation and interest expenses more than offset that contribution in its revised earnings estimate. I’d judge the resort investment on what remains after those costs, rather than treating the projected income as a straightforward boost to shareholders.

Jefferies raised its 12-month price target to $330 from $305, implying about 17% upside from the previous session’s closing price of $282.32. The upgrade from “hold” rests on a stronger cruise yield outlook as well as expected income from Sandals.

“Our investment framework on RCL over the past 18 months ultimately proved too conservative,” analyst David Katz wrote in Thursday’s research note.

The resort income comes with a financing bill

Royal Caribbean has agreed to acquire a 50% interest in Sandals Resorts International for approximately $3 billion. Jefferies estimates that the joint venture’s 2027 contribution will be equivalent to $0.59 per share in adjusted earnings.

That is a meaningful contribution, but it does not translate into a higher overall earnings forecast. Jefferies lowered its 2027 adjusted earnings estimate to $20.80 per share from $21.04. The transaction-related increase in debt weighs modestly on near-term earnings.

The revised estimate still exceeds Royal Caribbean’s guidance of more than $20 per share and Wall Street’s $20.33 consensus. Jefferies also increased its 2027 adjusted EBITDA forecast to $8.70 billion from $8.66 billion, against consensus expectations of $8.51 billion.

The bank has not included potential cost savings or other benefits from combining the businesses. Katz expects those benefits to emerge later. That leaves room for improvement, but the current forecast should stand on its own without borrowing support from savings that have yet to arrive.

Royal Caribbean has secured committed debt financing from Morgan Stanley. The precise borrowing terms have not been disclosed. Completion of the Sandals transaction remains subject to regulatory approvals and other customary conditions, with closing expected in early 2027.

A stronger cruise forecast and a higher valuation multiple

The cruise business provides a separate reason for Jefferies’ more bullish view. The bank now forecasts 2027 net yield growth of 3.3%, up from 2.9% previously and above Wall Street’s 3.1% consensus. Its assumptions include higher occupancy, increased onboard spending and modest gains in ticket pricing.

Those are forecasts, not results already delivered. Still, they give the upgrade more substance than a bet on what Royal Caribbean and Sandals might eventually achieve together.

Fuel remains a substantial expense. Jefferies raised its projected 2027 fuel bill to $1.45 billion from $1.25 billion. Its fuel-price assumptions for both 2026 and 2027 exceed the peak reached in 2022 following the Russia-Ukraine war, even after adjusting for inflation. The bank considers fuel prices nearer a peak than a trough, while acknowledging uncertainty around developments in the Middle East.

For the third quarter, Jefferies now expects adjusted earnings of $6.26 per share, down from $6.30 because of slightly higher depreciation and interest costs. That is below the $6.36 consensus and Royal Caribbean’s $6.31 guidance. Quarterly revenue is forecast at $5.58 billion.

The valuation argument is where Katz leans bullish. Royal Caribbean trades at less than 13 times next-12-month enterprise value to EBITDA and below 12 times estimated 2027 EBITDA. Jefferies says the shares have rarely traded at a cheaper valuation since March 2025.

The higher price target also uses a higher multiple: 12.5 times, compared with 12 times previously. So the upgrade asks investors to accept a richer valuation even as the bank trims its earnings estimates. That can be a defensible call, but it is different from saying the Sandals purchase immediately improves the bottom line.

Jefferies selected Royal Caribbean as its top buying opportunity heading into the quarter, with a downside scenario of $191 per share and an upside scenario of $460. It identified debt management, entry into river cruising and worldwide ship deployment as principal risks.

The upgrade follows similar rating changes from Bank of America and Deutsche Bank, which assigned targets of $330 and $299, respectively. LSEG data cited alongside Katz’s note showed 24 of 30 analysts rating Royal Caribbean a buy or strong buy, with six assigning hold ratings.

For guests, the businesses remain separate

The Sandals investment extends Royal Caribbean’s business into a portfolio of 20 Caribbean resorts. Sandals serves adults and couples through its all-inclusive properties, while Beaches caters to families. Royal Caribbean’s wholly owned cruise brands include Royal Caribbean International, Celebrity Cruises and Silversea.

A shared joint-venture board will be led by Royal Caribbean Group chairman and chief executive Jason Liberty and Sandals Resorts executive chairman Adam Stewart. Stewart will retain his executive chairman role at Sandals and Beaches and continue overseeing their long-term growth strategy.

Existing reservations, resort operations and cruise operations will continue unchanged. Sandals Select Rewards and Royal Caribbean’s Crown & Anchor loyalty program will remain separate for now. The companies are exploring broader distribution and ways to help travelers find products across their portfolios.

The disclosure I’d want next is the cost of that committed financing. A $159 million income forecast is useful. It is not the same as knowing what shareholders keep.