Market Report: Bullish broker comment lifts Reed Elsevier

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The Independent Online

Reed Elsevier stood out in an otherwise lacklustre market last night, trading higher after a leading broker turned positive on the media sector.

Credit Suisse upgraded the sector to "overweight" from "underweight", citing the underperformance of media stocks, more reasonable earnings expectations, depressed valuations and the ability, following the adjustment of margin forecasts, to differentiate between sub-sectors with higher and lower structural risks.

Happily for investors, the broker also highlighted the prospect of a recovery. "The last two cycles have seen media stocks experience strong rallies, particularly the agencies, whose share prices bounded between 80 per cent and 102 per cent. Rallies typically occurred up to three months ahead of their respective GDP inflection, which at the start of this year was in our view at least [one to two] quarters away," the broker said.

"Although green shoots have yet to emerge, we now look two quarters closer and anecdotally are hearing of signs of stabilisation – a necessary first step in the recovery process."

Reed, which gained almost 4 per cent or 17.2p to 457.25p, was among Credit Suisse's recommendations, as was WPP, which pared some of the losses inspired by a Citigroup "sell" note in the session before, rising to 388.25p, up 1 per cent or 3.75p last night. The broker was also positive on Pearson, which was slightly lower at 581p, down 4.5p.

"These stocks have de-rated along with the sector to well below historical trading ranges, but in our opinion should suffer far less from the structural headwinds of digitisation," Credit Suisse said, adding that the downside risk was offset by "their already depressed valuations, relative earnings and greater size/liquidity".

Overall, it was a quiet day, as the usual Friday afternoon hush was exaggerated by a market holiday over on Wall Street. The FTSE 100 closed 2.01 points firmer at 4,236.28 amid light volumes, while the FTSE 250 edged up by 2.97 points to 7,376.98.

Imperial Tobacco was 1 per cent or 15p ahead at 1,580p, following some supportive words from Deutsche Bank, which said the company had made a "strong start" on day one of its investor trip to Morocco earlier this week. "Contrary to the stereotype, [Imperial's] mature EU positions should produce consistent, sustainable profit growth, supplemented at the group level by emerging market opportunities," the broker said, adding that it included the group's US cigarette business in the latter category.

Among the banks, Lloyds was 2.4 per cent or 1.6p heavier at 67.5p after UBS reiterated its "buy" advice, saying that while the first half performance was likely to be uninspiring, "the market is underestimating how quickly Lloyds' earnings power can recover". "In our view, the Government's asset protection scheme underwrites a V-shaped recovery, which will be harder for other European banks to achieve, leading to normalised earnings of around 20p by 2011-12."

Other banks, including Royal Bank of Scotland, up 0.88p at 38.785p, Barclays, up 8p at 297p, HSBC, 8.7p at 509p, and Standard Chartered, up 11p at 1166p, were also firm.

Elsewhere, Bunzl, the specialist distribution group, was 1.1 per cent or 5.5p heavier at 509p after Morgan Stanley initiated coverage on the stock with an "equal weight" rating and a 680p target price, saying that while shares looked attractively valued, the two key drivers for Bunzl, namely input cost inflation and mergers and acquisitions activity, remain negative. "Until we see a change in either of these areas, we struggle to see a catalyst for share price recovery," the broker said.

On the second tier, Dana Petroleum drifted 12p lower to 1,368p, with traders giving short shrift to renewed speculation about a 1,800p per share bid from RWE, the German utility.

Michael Page International, the staffing group, which is due to update the market next week, closed at 230p, down 0.75p. Seymour Pierce reduced its target price to 220p from 250p and reiterated its "underperform" recommendation. "The pace of decline is slowing but we are not yet at the turning point and there is no sign yet that permanent staffing, which contributes to over 70 per cent of net fee income, is set to recover in the short term," the broker said.

On the upside, McBride was 3.5 per cent or 5p stronger at 147p thanks to Goldman Sachs, which upgraded the stock to "neutral" from "sell", with a 152p target price revised up from 137p.

"We believe McBride has traded well through the current downturn, benefiting from the consumer trading down to private label household and personal care products," the broker said. "At the same time, the company has demonstrated its ability to pass on what was significant cost inflation through pricing and through reducing operating costs."

Goldman also boosted HMV, which gained 2.7 per cent or 3p to 116p, after the broker upped its forward earnings forecasts on the back of the company's results. "We believe that HMV will successfully capitalise on the market share opportunities available, in particular during the Christmas trading period," Goldman said, raising its target for the stock to 149p from 145p.

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