Market Report: Broker helps to drive Carphone higher

Carphone Warehouse stood out as the market, undermined by profit-taking at the beginning of the week, attempted to change course last night.

The stock closed almost 5 per cent or 8.9p higher at 192.4p after Cazenove looked ahead to the demerger of the group's TalkTalk broadband business. Referring to the Carphone's retail and broadband arms, the broker said the process, expected to be complete by July next year, should "serve to highlight the standalone and strategic value of both of the group's main operating divisions".

"On completion, TalkTalk UK will be a [listed] broadband provider with [earnings] growth substantially ahead of the European telecoms sector as it extracts synergies from the integration of Tiscali UK, which was acquired in June 2009," Cazenove explained.

The remaining retail business is also well positioned to increase profits, thanks to its investment in gross margins, which should pay off as a recovery takes root. "While we retain concerns about the execution of this venture, we recognise it as a material opportunity and believe the downside risk is limited," the broker added, switching its stance on Carphone's stock to "outperform".

Overall, the FTSE 100 tried to recover from Monday's losses, touching a session high of 5189.88, but relaxed in the final hours of trading, closing at 5142.6, up 8.24 points. The FTSE 250 also closed off the day's highs, gaining 28.02 points to 9248.67.

The gains came as the City hedge fund manager Crispin Odey said stock markets were "entering a bubble phase", which may last until the end of this year. "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds. At such moments valuations are less important. Everything looks cheap against cash and government bonds," he explained in a note to clients. "The latter are expensive because of the QE [quantitative easing programme] which has caused that bubble. The low yields on government bonds propel money sensibly into higher yielding equities."

The miners drove the benchmark index, as bargain hunters moved in to capitalise on Monday's weakness. The Eurasian Natural Resources Corporation was the strongest of the lot, gaining 4.4 per cent or 38.5p to 912.5p, while Fresnillo rose to 780.5p, up 3.6 per cent or 27p. Rio Tinto was 2.4 per cent or 63.5p heavier at 2707.5p, and Vedanta Resources advanced to 1976p, up 1.9 per cent or 36p. Antofagasta rose to 779p, up 1.8 per cent or 13.5p.

Marks & Spencer, which was supported by some positive comment from Société Générale in the session before, enjoyed another day of gains after Bank of America Merrill Lynch weighed in. Raising its target price for the stock to 450p from 410p, the broker said that updates from Next and Debenhams had served to strengthen its conviction that "gross margins in the clothing sector are benefiting from a combination of a soft sourcing environment and tight inventory control".

"For M&S we now forecast an overall gross margin fall of around -80 basis points in 2010 compared to company guidance of - 125 basis points to -175p basis points," Merrill said, helping the stock to rise to 380.9p, up 1.7 per cent or 6.5p.

Next, the target price for which was raised to 2100p from 1850p at Morgan Stanley, was 10p weaker at 1852p, while FTSE 250-listed Debenhams firmed up by 0.8p to 79.15p.

Elsewhere, utilities were unsettled by the prospect of a rights issue – discussed in an Evolution Securities circular published on Monday – at Severn Trent. At the close, Severn was 1.5 per cent or 14.5p behind at 983.5p. In the wider sector, United Utilities fell to 455.4p, down 2.2 per cent or 10.1p, while mid-cap peer Northumbrian Water eased to 251.5p, down 3.5p.

Over on the FTSE 250, the house-builder Taylor Wimpey retreated to 43.18p, down almost 2 per cent or 0.85p, after Panmure Gordon weighed in, switching its stance on the stock to "hold" from "sell". "Although we believe the group is now on a much more stable footing following [its] rights issue earlier in the year, in our view, the stock's valuation versus the value of its sector peers has now run a little ahead of itself," the broker said.

In the wider sector, Barratt Developments, flat at 268.5p, and Redrow, down 1.5p at 233.5p, were the subject of late reports suggesting that the two may be set to launch rights issues.

On the upside, Misys gained almost 2.6 per cent or 5p to 200.7p following some words of support from UBS, which moved the stock to "buy" from "neutral" on account of valuation. "The shares have underperformed their UK peers by between 13 per cent (Sage) and 47 per cent (Logica) since reporting [full-year] results on 24 July,' the broker said, raising its target price for the stock to 230p from 195p.

At the close, Sage was 0.6p firmer at 225.2p, while Logica, the target price for which was raised to 157p from 147p at Bank of America Merrill Lynch, gained 2.1p to 134.7p. "Despite the recent strong performance Logica is only trading on 11 [times] our 2010 forecast earnings," Merrill said. "This is still lower than the historical range which was about 13-15 [times] one year forward earnings."