Market Report: JP Morgan warns over Sainsbury's price cuts

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JP Morgan certainly did not pull any punches in its bearish note on Sainsbury's yesterday. The heavyweight broker warned clients that a profit warning was likely from the supermarket group by 19 May, when its posts its full-year figures, and such talk certainly unsettled the market as Sainsbury's dropped 5.5p to 278.5p.

JP Morgan certainly did not pull any punches in its bearish note on Sainsbury's yesterday. The heavyweight broker warned clients that a profit warning was likely from the supermarket group by 19 May, when its posts its full-year figures, and such talk certainly unsettled the market as Sainsbury's dropped 5.5p to 278.5p.

According to JP Morgan's information, the supermarket group cut prices by 2 per cent last weekend, as it moves to make its prices more competitive relative to its rivals. However, even after the cut, the US broker calculates that Sainsbury's prices are at least 5 per cent more expensive than Tesco and warned a response from Tesco and Asda is very likely.

Meanwhile, in order for Sainsbury's price reduction to be profitable, JP Morgan believes the company will need to enjoy a massive uplift in sales. It fears that this is not going to happen. "A 2 per cent cut in price means that Sainsbury's would require a 14 per cent increase in sales for the price cut to be profitable, assuming all costs and competitor pricing stays the same. We think such a volume response is unlikely," JP Morgan said.

Although the broker applauded Sainsbury's attempt to become more price-competitive it told investors to expect short-term pain on the earnings front and a possible profit warning. Should a profit warning accompany annual results from the supermarket giant later this month, it would be the company's second in as many months. A spokesman for Sainsbury's denied that such a setback is about to happen, noting that the company is just five weeks into its new financial year and it is far too early to be able to gauge whether it will meet City forecasts.

The wider FTSE 100 was also in retreat, falling 53 points to 4,516, amid a growing belief that interest rates are on the way up. The Bank of England's Monetary Policy Committee raised UK rates by 0.25 basis points to 4.25 per cent while employment data out of the US showed that the economy continues on the road to recovery, leaving traders to conclude that rates there will also have to rise soon.

Jarvis, the troubled support services group, put on 0.25p to 94.75p on rumours that the company is planning a rights issue. Morgan Crucible gave up 7p to 135p as Credit Suisse First Boston urged clients to take profits from the stock's strong run. Shares in the engineering group have quadrupled over the past year. "We are sceptical that Morgan Crucible will retain much of the promised restructuring benefits given continued price pressure and increasing cost pressures in it activities," CSFB said. Setting a 115p price target on the stock, the Swiss broker said: "We struggle to see any further upside in the shares from here."

The rising oil price hit the European airline sector hard, an industry with a cost base heavily dependent on the value of fuel. British Airways lost 11.25p to 268.75p while Ryanair dropped ¤0.14 to ¤4.39. The latest Rajar listening figures spelt good news for some radio groups and bad news for others. According to analysts, Capital Radio, off 9p to 463p, was among the winners as its flagship 95.8FM station enjoyed an increase in market share. Chrysalis, off 9.5p to 210p, was not so lucky. The audience share of its Heart 106.2FM station in London slipped back to levels last seen in 2002.

Last week we saw bear raiders attack Proteome Science as they took advantage of a large bull position in the stock held via contracts for difference. Yesterday, dealers feared that A similar assault may be under way on Fibernet, down 1.5p to 121p, where there is also said to be a large contract for difference (CFD) bull position.

CFDs allow punters to leverage themselves to, say, gain exposure to shares worth £100,000 by putting up a relatively small amount of cash. But when a position goes the wrong way, they usually have to rush to close, causing share price movements to be greatly exaggerated.

Amec dropped 14p to 291p after the group warned of delays to booking of sales from £1.1bn of Iraqi contracts. The group said that while orders relating to water reconstruction contracts have been received and work commenced, security challenges in Iraq made it difficult to predict the value of work to be completed in 2004.

Investors continued to wait for a statement from Sibir Energy about the status of its joint venture with Roman Abramovich's Sibneft. Shares in Sibir, the Russia focused oil group, were suspended last month at 28p and it had been expected that the company would issue an update to the market this week. The AIM-listed group recently discovered that its 22.5 per cent stake in Sibneft-Yugra has been mysteriously diluted, and now stands at less than 1 per cent, leaving Sibir facing a £100m loss.

Nicholas Berry, a member of the family that used to own The Daily Telegraph, will certainly be happy he no longer has a shareholding in the company. He once controlled around 6 per cent of Sibir but sold the last of his holding in November 2003.

Market Movers

Royal Bank of Scotland 1,642p (up 17p, 1.1 per cent). Raises £2.5bn by issuing 156 million new shares at 1,620p each.

easyJet 225p (up 6p, 2.7 per cent). JP Morgan urges investors to take advantage of the recent weakness in the stock and buy into it.

Bell 171p (up 57p, 50.0 per cent). Sweden's Securitas AB tables a 175p-a-share bid for the company, valuing it at £97m.

CSR 305p (up 47p, 18.2 per cent). Posts a pre-tax profit for the three months to 2 April of $7m, compared with a loss of $2.9m a year earlier.

Henlys 21.75p (up 3p, 16.0 per cent). Michael Ost steps down as chairman to become deputy chairman.

Stanelco 6.12p (up 0.62p, 11.3 per cent). Unveils the acquisition of Aquasol for £3m.

Inter-Alliance 1.37p (up 0.12p, 9.6 per cent). Posts a solid first-quarter trading statement boasting of a 23 per cent rise in volumes.

Integrated Asset Management 65p (up 5.5p, 9.2 per cent). Full-year figures reveal reduced losses at the group while directors add to their holdings in the wake of the results.

Newsplayer 30.25p (up 2.5p, 9.0 per cent). Says it may buy United Business Media's 20 per cent stake in Satellite Information Services for £20m.

Northern Petroleum 7.87p (up 0.62p, 8.5 per cent). Says it has bought a 4.2 acre site on the Isle of Wight and applied for planning permission to drill a test well.

Huntsworth 24p (up 0.25p, 1.1 per cent). Buys Strategy Communications, the Bristol based public relations group, for £500,000.

Millennium & Copthorne 319.75p (down 13p, 3.9 per cent). Posts weaker than expected Q1 results, prompting Merrill Lynch to reiterate "sell" rating.

Titon Holdings 95p (down 32.5p, 25.5 per cent). Interim results disappoint as the company complains of growing competition.

Matisse Holdings 3.75p (down 1.25p, 25.0 per cent). Unveils plans to raise £140,000 via a share issue.