Royal Caribbean’s Buy upgrades don’t settle the $3 billion Sandals question

Royal Caribbean plans to invest about $3 billion for half of Sandals and Beaches Resorts. Truist expects the deal to add roughly 0.5% to earnings per share in 2027, its expected closing year. The longer-term EBITDA forecast looks to the end of the decade.

That makes the longer-term forecast worth scrutiny. I want a tougher standard for judging the resort investment than for deciding whether Royal Caribbean shares look attractive after a steep decline. A good price for the stock and a good use of $3 billion are separate judgments.

Bank of America and Deutsche Bank endorsed both on Monday, upgrading Royal Caribbean Group to Buy and backing the planned Sandals investment, which had initially received a negative market reaction. Shares gained more than 2.5% in afternoon trading.

The upgrades followed seven consecutive weekly declines that left the stock about 26% below its August 5 closing peak and down roughly 13% for the year. Neither bank raised its price target. Bank of America’s Andrew Didora moved from Neutral while keeping a $330 target, and Deutsche Bank’s Chris Woronka moved from Hold while retaining a $299 target. Those targets imply approximately 36% and 23% upside, respectively, from Friday’s close.

There is a straightforward valuation argument there. The case for expanding into resorts takes more work.

The Sandals forecasts reach several years ahead

Royal Caribbean announced the planned 50% equity investment last week. The transaction has committed debt financing from Morgan Stanley and is expected to close in early 2027.

Didora estimates the partnership could contribute approximately $900 million in earnings before interest, taxes, depreciation and amortization by the end of the decade. Under his forecast, that would lift Royal Caribbean’s overall EBITDA by a percentage in the low- to mid-teens. He sees an opportunity for the cruise group’s operating expertise to accelerate growth at the resort business.

That is a meaningful potential contribution. It is also a forecast that depends on what happens after the purchase. Operating expertise is a credible reason to consider the combination, but it does not establish how much better the resort business will perform under the partnership.

Woronka backed the joint venture’s strategic rationale and financial terms. Tigress Financial Partners, which maintained its Buy recommendation, estimated that the transaction values the hospitality earnings being acquired at roughly 10 times EBITDA.

Those arguments deserve consideration. Truist projects modest EPS accretion in 2027, while Didora sees a potentially meaningful EBITDA contribution by decade’s end. Those are different measures, not a like-for-like picture of how the payoff will develop. The longer-term forecast deserves scrutiny of its own.

I’m comfortable judging a long-term investment beyond its first year. I’m less comfortable brushing aside questions about strategic fit on the strength of that forecast. BMO Capital Markets retained an Outperform rating and $370 target while warning that questions about the transaction’s timing and fit could continue to weigh on the shares.

The cruise business gives analysts firmer ground

The operating evidence behind the upgrades is more immediate.

“Travel spend has grown mid- to high-single digits since February and cruise spend reaccelerated to mid-teens growth in July and August,” Didora wrote in his research note.

He also cited management’s comments about steady demand at a recent Bank of America conference. Those remarks supported his expectation for net yield growth of at least 4% in the fourth quarter of 2026, which he expects to lead the industry. For 2027, he believes Royal Caribbean can guide toward its historical annual net yield growth range of 2% to 3%.

Woronka attributed the selloff primarily to higher oil prices and concerns about the durability of cruise pricing growth. He estimated that fuel costs represent about 7% of Royal Caribbean’s revenue even at current prices, and called the valuation decline “overly punitive based on RCL’s growth profile ex-fuel.” Bank of America also pointed to fuel hedging extending into 2027 and an investment-grade balance sheet.

UBS retained its Buy recommendation and $367 target, citing preliminary results from TUI Cruises, part of Royal Caribbean’s 50%-owned joint venture with TUI AG. TUI Cruises reported a 12% increase in vessel capacity and a 2% improvement in per-day pricing for the quarter ending in September.

That gives the bullish cruise argument something concrete to work with. It does not require Sandals to deliver its end-of-decade forecast.

Earnings still need to support the confidence

Royal Caribbean’s results released July 28 were not uniformly stronger. Quarterly earnings of $4.21 per share beat the $3.98 consensus estimate but fell from $4.38 a year earlier. Revenue increased 6.5% to $4.83 billion, slightly above expectations of $4.82 billion.

Full-year 2026 earnings guidance stands at $17.73 to $17.87 per share, with third-quarter guidance of $6.26 to $6.36. JPMorgan recently raised its target to $394 from $345 and retained an Overweight rating, citing improving yield trends.

Carnival is scheduled to report fiscal third-quarter results Tuesday before the market opens. FactSet consensus calls for adjusted earnings of $1.35 per share, down from $1.43 a year earlier, and revenue of $8.39 billion, up about 3%. Deutsche Bank expects a modest earnings beat but sees the possibility of a reduction in Carnival’s fourth-quarter pricing outlook.

There is enough here to understand why analysts see value in Royal Caribbean after the selloff. The resort investment deserves its own scrutiny. Strong cruise performance should raise expectations for what management does with $3 billion, not lower the burden of proving it was well spent.