What happened

Shares of Carnival (CCL 1.13%) were trading down 6.3% as of 11:28 a.m. ET on Thursday after Susquehanna started coverage of the company with a $15 near-term price target. 

However, analyst Christopher Stathoulopoulos preferred Norwegian Cruise Line Holdings (NCLH -0.21%) and Royal Carribean Group (RCL 0.54%) over Carnival due to their relative lack of exposure to geopolitical issues in Europe, whereas Carnival is the largest leisure travel company, with operations spanning North America, Europe, Australia, and Asia.

As a result, the analyst issued buy ratings for Norwegian and Royal Caribbean, while Carnival received a neutral rating.

So what

Stathoulopoulos sees the cruise industry starting to recover from the pandemic, but there are still headwinds, including debt burdens, ongoing pandemic restrictions, and a weakening economy. 

Carnival is slowly making progress to return to a profit. In 2021, the company exited 19 of its least efficient ships as part of its fleet optimization strategy. Carnival also lowered its planned capacity growth to approximately 2.5% per year, down from the previously planned 4.5%. 

Now what

By removing the least efficient ships, Carnival should be in better shape to return to profitability. After the business returns to full operations, management expects nearly 15% of its capacity to be larger and more efficient, which will accelerate the return to profitability. In the month of November in 2021, cash from operations turned positive, which was a good sign. 

However, the invasion of Ukraine is causing a "material impact" on the business, as Carnival noted in the first-quarter earnings report. Carnival guided for a net loss for the second quarter on both a reported and an adjusted basis, but in the third quarter, it expects to report a profit. But the company expects to report a loss for the full year.

With the economy not in the best shape with inflation still running above normal rates, Carnival and other cruise lines could see more pain in the near term before business takes a turn for the better.