Market Report: Merrill Lynch brings soaring Smiths to a halt

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The Independent Online

Merrill Lynch called time on Smith Group's soaraway share price yesterday, sending shares in the engineering conglomerate tumbling 27.5p to 826.5p.

Merrill Lynch called time on Smith Group's soaraway share price yesterday, sending shares in the engineering conglomerate tumbling 27.5p to 826.5p. After a near 40 per cent rise in the group's stock market value over the past 12 months, the US broker believes Smiths is now close to fair value and so downgraded its rating to "neutral" from "buy".

It believes that the benefits of Smiths' billion-pound acquisition programme are now fully reflected in the group's stock price. It also played down hopes that the company might be acquired by the US giant General Electric. "One reason to continue buying a fully valued stock like Smiths is for bid potential. However, we do not believe this is likely," Merrill Lynch argued.

Although Smiths would fit in well with GE's various divisions, the broker notes that Jeff Immelt, the chief executive officer of the US giant, has pledged his company will not be making any major acquisitions in 2005. Given that GE would probably have to spend $9bn (£4.8bn) to buy Smiths, such a deal certainly qualifies as being a "major" acquisition, says Merrill. Aside from GE, the broker sees few other companies being interested in buying Smiths as in most cases they would only get a good fit with about a quarter of Smiths' operations.

Elsewhere, the mining sector was set alight on news that Companhia Vale do Rio Doce of Brazil, the world's biggest iron-ore producer, is seeking a 90 per cent rise in the price of the commodity. This is great news
for Rio Tinto, up 70p to 1,690p, Xstrata, 15.5p better to 930.5p, and BHP Billiton, 15.5p higher to 652.5p. Of the trio, Investec Securities is most bullish about the prospects at Rio Tinto.

"The company has recently enjoyed a modest outperformance against its peers and the UK market, but we believe that investors are only just beginning to view the company in a more positive light once again and we anticipate the stock to continue to outperform," the broker said.

Meanwhile, the FTSE 100 surprised some with a strong rally during the afternoon. This erased losses suffered at the start of the session ­ which had left the index trading at 4,770.1 ­ and helped the FTSE 100 close 9.2 points higher on the day at 4,812.5. Dealers pointed to heavy trading in Lloyds TSB, 0.25p higher at 471.25p, and reported vague bid speculation. Takeover rumours have been popular in the banking sector of late. Last week gossips talked of Barclays as a likely target.

Bid speculation again surrounded HHG, pushing shares in the fund manager 2p higher to 61p. Also supporting the
stock was a bullish note from Bridgewell Securities. Even after HHG's strong performance over the past three months, the broker still believes the stock offers better value than its rivals Amvescap and F&C Asset Management. "We continue to recommend that investors switch to HHG and believe the company will perform well as it approaches the completion of the sale of its life business in April," said.

Invensys soared 13 per cent, or 2.25p, to 19.25p, after the engineering conglomerate unveiled plans to buy back ¤65m (£45m) worth of its debt. If the company is repurchasing debt it shows it is quite sure of its future financial stability. But analysts noted that the buy-back does little to reduce its total debt burden, which still stands at about £1.6bn. Invensys also assured the market that its various businesses are performing inline with expectations.

Lower down the pecking order, Protherics ticked 0.5p higher to 64p on talk the biotech is close to announcing a partnership agreement for one of
its major products. Ricardo jumped 14p to 257.5p on whispers of strong trading at the engineering consultantcy. The company is said to be enjoying strong demand from Asia and China and upgrades to profit forecasts could soon be on
the way.

Office2Office improved 0.5p to 254p as brokers reported solid demand for the stock from institutional investors.

Homestyle gained 1.5p to 131p as Investec Securities tipped the retailer to post a solid set of interim results on Thursday. According to the South African broker, the soft furnishings specialist has had a good Christmas, helped by the recent collapse of its rival Courts. "Given anecdotes of reasonable sales for the furniture trade and given the exit of Courts, which has relieved pressure on pricing and generated market-share opportunities for others, we believe that Homestyle's performance should be relatively encouraging," Investec said.

Finally, Avocet Mining added 3.5p to 96.5p after its chairman Nigel Scott bought 230,000 shares at 92p. He now controls 5.7 million shares or 5.6 per cent of the company.