Market Report: Broker backing pushes M&S to six-year high

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The Independent Online

Lehman Brothers was among the most bullish about the retailer's prospects, suggesting that M&S could achieve pre-tax profits of up to £1bn in the year to March 2008.

The broker argued that M&S's results, released this week, demonstrated that the retailer's recovery is on track and that the chain's growth is sustainable. As an initial step, Lehman raised its price target on the stock to 505p from 445p.

The broker said: "Although the stock has performed well in recent months, we believe that the top-line momentum the group is delivering is being driven by fundamental changes to the way it sources, buys and prices its clothing." It predicts further top-line improvement going forward.

Meanwhile, JP Morgan also applauded the interim results M&S unveiled on Tuesday. It expects to see the retailer announce a marked improvement in full-price sales at its post-Christmas trading statement as well as further profits-margins gains at its annual results in May.

Elsewhere in the sector, Kingfisher dropped 2.75p to 219.75p as Panmure Gordon slashed its earnings forecasts for the DIY retailer. For the current year, the broker trimmed its pre-tax profits estimate by 12 per cent to £398m because of the sales and margin pressure at the group's B&Q division. "We see ongoing risks to market estimates," the broker warned investors.

Panmure is also concerned about some of the seasonal products B&Q has on offer, such as the chain's illuminated reindeer and eight-foot inflatable Santa. The broker fears these goods are unlikely to appeal to cash-strapped consumers.

On the much-debated issue of whether Home Depot will one day take over Kingfisher, Panmure suggested that Wolseley may be a better strategic fit for the US DIY giant than Kingfisher.

Woolworths added 1p to 34p in heavy trading amid rumours of an imminent 45p-a-share cash bid for the discount retailer. The telecoms sector was also awash with talk of consolidation. Cable & Wireless put on 1.25p to 122.25p as the group's chairman, Richard Lapthorne, said it is almost certain that his company is being eyed by predators. He was also reported as suggesting that private-equity firms may find more value in C&W than the stock market.

Kingston Communications, steady at 56p, was once again being touted as a takeover target. Gossips reckon news of a 85p-a-share deal could accompany the Hull-based group's results this month. Analysts agreed that Kingston would make a good bolt-on acquisition for a larger fixed-line player.

Dealers reported speculation that Pearson, off 2p to 652.5p, is considering the sale of the Financial Times. The rumours follow the replacement of the paper's editor, Andrew Gowers, with Lionel Barber. Lorna Tilbian, at Numis Securities, values the newspaper at £573m, and suggested that if it were sold Pearson could return up to 72p a share to shareholders.

The Numis analyst predicts numerous private-equity firms would be interested in the FT but calculated that the paper is worth a lot more to trade players such as Dow Jones, the US publisher of The Wall Street Journal, Rupert Murdoch's News Corporation or Daily Mail & General Trust.

The wider FTSE 100 fell 21.1 points to 5,439.8; the FTSE 250 was also in retreat, down 19.5 to 7,989.2. BG Group, off 1.5p to 525.5p, was held back by a downgrade at Lehman Brothers. The US broker cut its rating on BG to "underweight" from "equal weight" and argued that there was better value elsewhere in the sector. Lehman warned those hoping the group will soon be bought that there is a substantial bid premium priced into the stock.

Lower down the pecking order, Empire Online lost 3.5p to 99p as hopes faded that PartyGaming will buy the company at a premium to its current valuation. PartyGaming confirmed an interest in acquiring Empire Online last week and, in as a result of the news, a takeaway price of 135p a share was mentioned by some. However, market professionals suggested that the chances of Empire Online securing such a price look "distinctly flaky".

Vanco rose 10p to 517p after the telecoms group unveiled two contract wins worth a total of £28m. CSS Stellar, steady at 39p, disclosed that Acquisitor Holdings, the AIM-listed activist investment company, had raised its stake to 4.5 million shares, or 15.8 per cent, in the marketing and management consulting company.

Finally, Quarto rose 3p to 186.5p on the back of a bullish trading update from the publishing group. Quarto impressed the City with a rise in sales in October to £8.6m from £7.3m.