Question

Southern airline inc.announced that its net income in the first quarter jumped percent to $100 million as number of passenger climbed. The airline also booked of $40 million from the sales of 2 aircraft. According to the survey of 6 analysts average estimate of the first quarter net income for the airline was $200 miliion. After earning announcement what would be the possible movement of the company's stock. Please explain with any financial concepts and theories?

Answer 1

The stock price of the Southern Airline Inc. would go down.

There are two reasons for this analysis:

1) The net income for the quarter missed the analyst estimates by a huge margin of $100 million. This would show that the business had not been profitable as expected. This would lead to weakening of the investors' faith in the company and hence would lead to a decrease in stock price.

2) A great chunk of the net income in quarter 1 is generated due to sale of the 2 planes which means that the growth in business of the airline has not been good. The sale of planes is a one time event and hence it is unlikely that this would be replicated in the quarter as well which means that the net income of the company should go down. Also,as they have sold planes the business is likely to suffer as they will have less planes from which they can generate revenues. This would reduce the revenues and hence the net income. Thus the stock price should drop.