Market Report: Earnings hopes underpin demand for Rolls-Royce

Rolls-Royce stood firm last night, with the bulls taking the view that, besides boasting defensive characteristics that come in handy during times of stress, the engineering giant offered a way to benefit from the expected increase in civil aerospace earnings in the years ahead.

JP Morgan Cazenove triggered interest after labelling the stock the best defensive investment in the aerospace and defence sector, a useful endorsement given the still volatile appetite for risk. The broker said that while the wider sector faced concerns about the impact of the looming fiscal squeeze, Rolls stood out, boasting diverse earnings and a strong balance sheet with £1.4bn in net cash. But that's only part of the story, for the engineer was also primed to capitalise on the expected turnaround in civil aerospace earnings.

"[Earnings from] civil aerospace fell again in the first half of the year, with the downturn in traffic now as severe as post-9/11. We now forecast [civil earnings over 2010] to be down 20 per cent from the 2008 peak, but believe this marks the trough," the broker explained, helping the shares to rise by 6p to 559p.

"Aircraft utilisation continues to improve... and structural growth from new aircraft deliveries should support a strong rebound in earnings per share over the years ahead."

Overall, the market reversed course, though traders remained sceptical about the potential for a sustainable rebound in the sessions ahead. The benchmark FTSE 100 index, underpinned by the mining sector, rose by 46.44 points to 5,155.84, while the mid-cap FTSE 250 index closed at 9,677.7, up 54.11 points thanks to good news on the all-important US economy.

After days of negative data, traders were relieved to hear that the number of Americans making new claims for unemployment benefits had declined by more than expected last week. That said, there was also a scrap for the bears, with the four-week average of new claims – seen as a better measure of underlying trends – rising to its highest level since late November.

Kazakhmys stood out, gaining 56p to 1,129p after issuing a well-received earnings report. The miner also reiterated its full-year production targets, lifting the mood across the wider sector. Commodity stocks – and Xstrata, up 23.6p at 999.7p, in particular – were also cheered from Glencore's first-half earnings. The Swiss commodities trader and Xstrata shareholder posted a surge in profits and revealed plans for spinning off or floating its gold assets. Somewhat predictably, evidence of Glencore's strengths stoked rumours of a bid for Xstrata, but these failed to gain traction.

Elsewhere, retail stocks were supported by a CBI survey pointing to strong sales growth over August. The news lifted the mood surrounding companies such as Next, which rose by 46p to 1,978p, and Home Retail Group, which closed at 215.5p, up 3.4p. High-street bellwether Marks & Spencer, up 6.4p at 340.6p, received additional support from the analysts at Bank of America Merrill Lynch, who upped the stock to "neutral" from "underperform".

"The M&S share price has fallen by around 15 per cent [in the] year to date on concern over the UK consumer outlook and appears stuck in a holding pattern as the market waits for chief executive Mark Bolland's strategic update in November," they said, revising their target to 360p. "Although valuation is not compelling and we still have some longer-term concerns, recent industry food data has been encouraging and M&S's inventories appear well controlled."

In the oil and gas sector, Tullow Oil firmed 21p to 1,259p after UBS said Wednesday's sell-off had been overdone and offered a buying opportunity. The oil prospector was hit by worries that the development of its Ugandan fields could be delayed owing to a tax dispute between the local government and its former partner Heritage Oil, which touched a session low of 300p, down 5p, before recovering to 304.6p, down just 0.4p, by the close.

The engineering group IMI was 7p behind at 657.5p, with post-results profit-taking offsetting the impact of a push by Citigroup. The broker published a sector round-up, identifying IMI and Cookson, up 12.6p at 424.9p, as stocks that appeared relatively attractive in both a double dip and a high growth scenario. "Bodycote [up 1.9p at 216.4p] does not look overly attractive on a relative basis in either case," Citi said, adding that its own economists, though mindful of the fact that "the next few months could be bumpy", did not foresee an economic double dip.

Further afield, Credit Suisse supported Domino's Pizza, the pizza delivery specialist, which rose 3.7p to 413.5p after the broker adopted an "outperform" stance, flagging the prospect of continued sales growth over the second half. "The recent launch of a lunchtime campaign, backed by national advertising, should support second-half like-for-like sales following positive results from the soft launch and evidence from successful campaigns in the US and Australia," the broker said, setting a 500p target on the stock.

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