The chip-maker ARM was in focus last night after Liberum Capital sounded a note of caution on the semiconductors market.
Most semiconductor companies are expected to have done well recently, with demand having remained healthy over the first three months of the year. Scrutinise the trends, however, and the gains point to trouble further out, Liberum explained, pinning part of the the strength on double ordering and inventory building across the supply chain. A recent report by VLSI Research, for instance, said that February semiconductor inventories were running close to the peak struck in October 2008, and were up some 46 per cent year on year. This, the broker warned, could push inventories to an "unhealthy level" at the end of the first three months of the year.
"Historically, semiconductor share prices have tended to underperform at times of high inventory levels as the market gets worried about a weaker medium-term outlook following a potential inventory correction," Liberum said. "We believe that this is likely to hold true after the first quarter results as well, particularly if we see a broad-based rise in industry inventories, as we expect."
ARM, which ended 3.5p to higher at 244p last night, is likely to have performed well over the first quarter. Moreover, its results will benefit from the recent weakness in the pound. But again, the outlook for the industry as a whole remains a concern, according to the broker, with ARM's royalties and valuations likely to be affected in the event of an inventory correction. Worries about some loss of share to Intel in the smartphone segment, along with valuation concerns, also weigh on the investment case, Liberum said, sticking to its "hold" view on the stock.
Overall, the market switched course, with a turnaround in the mining sector driving the FTSE 100 to 5,770.98, up 58.28 points. The FTSE 250 also mounted a comeback, adding 83.8 points to 10,463.28. Overnight news from a number of US retailers, who posted gains in monthly sales, lifted confidence in the American economy. That in turn prompted a revaluation of the demand outlook, with traders, who on Thursday were fretting about the fragility of the recovery, expressing optimism about an uptick in the world's appetite for commodities.
As a result, against the backdrop of firmer metals markets, Fresnillo rose by 30p to 884p. Lonmin was 48p higher at 2,113p, while Kazakhmys and Antofagasta rose to 1591p, up 34p, and to 1,062p, up 17p, respectively. Xstrata, which was reported to be mulling wading into the battle for the Australian coalminer Macarthur Coal, was 36p to 1,299p. Anglo American also fared well last night, rising by 73p to 2,979p.
Also on the upside, the defence group Cobham stood firm, edging higher by 0.6p to 275.3p, after Morgan Stanley reiterated its "overweight" stance with a revised 320p target price, compared to 300p previously. Naming Cobham its top pick in the European defence space, the broker said the company's focus on high growth areas such as intelligence, surveillance and cyber security meant that it was well placed to steal a march on its peers. "This should allow it to deliver 10 per cent [compounded annual growth in earnings per share] in 2009-12, well in excess of its global defence peers," the broker explained. "As such, we believe the stock's recent performance is set to continue."
Further afield, Premier Oil was 47p stronger at 1,332p after Royal Bank of Scotland, revisiting its estimates on the back of the oil & gas exploration and production results season, switched its stance to "hold" from "buy", naming Premier one of its top picks in the sector. "We detect a positive shift in sentiment since the full-year results," RBS said, revising its target for Premier to 1,500p. "The pressure on management to deliver in the 2010 drilling programme remains, but we like the balance of the campaign, and believe recent oil price strength is likely to throw a cheap valuation into sharper relief."
Elsewhere, RBS reiterated its positive view on Gulfsands Petroleum, which rose by 4p to 336p after the broker said that, regardless of whether or not Indian Oil Corporation and Oil India, who made a 315p per share approach in March, return with a higher offer, the initial pitch "served to highlight Gulfsands's cheap valuation". "With Oil India apparently having submitted a due diligence proposal, the ball would appear to be in Gulfsands's court, particularly given [that] major shareholders have gone public with their view that management should engage with the potential suitors," RBS said, repeating its "buy" stance, with a revised 400p target price, compared to 345p previously.
Victrex, the hi-tech plastics firm which shot up after reporting a hike in first-half sales volumes on Thursday, supplemented earlier gains, climbing to 1,007p, up 18.5p, after Citigroup raised its target price for the stock to 1,100p from 1,000p. "Victrex is a major beneficiary [of a] weak sterling given [that] its costs are mainly UK-based but its revenues are mainly dollar, euro and yen denominated," the broker said. "The company hedges forward on a 12-month rolling basis, so the benefit should continue through into 2011."Reuse content