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

Hello,
AS per the Details given in the question, net income of the Southern airline inc. for first Quater jumped to $100 million, but as per the expectation to the market the net income should be $200 million.
As per results are announced by the company share price of the company will fall, because they can't meet the expectation of the market. Net income of $200 million (expected) was already included in the current market price.
If the Net Income of the company is $200 million, the share price of the company should be same, but if NI greater than $200 million above the market expectation share price will definitely increase/jump.
If there is something rumours or news in the market about the company the the market will discount everything, all the rumours and news will already reflect in the current share price.
The Income ($40 million) arise from sale of aircraft is not an operating income of the airline. Because sale or purchase is not an operating business of the company.
While analysis the company result the ($40 miilion) should be deducted from Net income.

I hope this clear your doubt.

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