Market Report: EasyJet sputters on Goldman's advice to bale out

EasyJet met fresh turbulence yesterday after Goldman Sachs, worried by the rising price of oil and the company's exposure to the British consumer, advised investors to "sell".

"EasyJet has high UK consumer exposure, and with a surge in data points highlighting deterioration in UK consumer confidence, we regard [it] as vulnerable to a reduction in discretionary travel, especially in the price-stimutated leisure segment," said Goldman. The company's low fuel hedging and high operational leverage also gave the broker cause for concern.

"We are 50 per cent below September 2009 Reuters consensus and see significant risk to earnings," the broker added, sending easyJet to an intra-day low of 241p, its lowest level since July 2005. By the close, the stock had recovered to 246.25p, down 6.37 per cent or 16.75p.

British Airways, which is also rated "sell" at Goldman Sachs, was weak and lost 4p to 203.5p. "GS commodities research forecasts $150 per barrel oil by year-end, while our energy analysts' scenario allows for a possible spike to $200 per barrel," the broker said. "At these prices, the shape of the industry would almost certainly change. The industry would almost certainly contract, with fewer players buying fewer planes with fewer employees."

Overall, the FTSE 100 was down 53.6 points at 5,426.3 after the mining sector fell back under pressure from weaker coal prices and the retail sector slipped. The FTSE 250 was also weak and lost 262.6 points to 8,658.2. Dragged down by the housing sector, the mid-cap index closed at its lowest level since 2005.

On the FTSE 100, Marks & Spencer, down 24.53 per cent or 78p at 240p, highlighted the bleak state of trading on the high street in an unscheduled update.

The company said its UK like-for-like sales slumped by 5.3 per cent in the 13 weeks to 28 June while general merchandise sales were down 6.2 per cent and food sales slipped by 4.2 per cent in the same period. The retailer also announced the departure of Steve Esom, the director of food. "Given the operational gearing of the business, this kind of sales run-rate would knock at least £50m off full-year profits," said Nick Bubb, a retail analyst at Pali International, who reduced his target price for the stock to 275p from 300p. Panmure Gordon also reduced its target price for M&S, to 250p from 400p, and moved the stock to "hold" from "buy".

The wider retail sector was unsettled by the update and Next lost almost 8 per cent or 72p to 837.5p. J Sainsbury lost 20.25p to 290p and Tesco was down 19.3p at 343.7p.

In the banking sector, Barclays gained 3.75p to 285.25p after Cazenove said that the company "has raised sufficient capital to support balance sheet expansion (voluntary and involuntary) while maintaining a stable (5.5 per cent) equity tier one ratio through a UK economic downturn".

Earlier, the stock was hit after Citigroup said Barclays may need to raise £9bn on top of the recently announced £4.5bn cash call. The remainder of the sector was mixed: FTSE 250-listed Bradford & Bingley rose by 0.25p to 64p while The Royal Bank of Scotland, whose target price was cut to 240p from 260p at HSBC, was flat at 204p. HSBC also reduced its target price for HBOS, which slipped to 261p, down 8p.

The stock remained below its 275p rights issue offer price as Jabre Capital Partners, the Geneva-based asset management and advisory business run by GLG's former start trader Philippe Jabre, declared a 0.27 per cent short position the company.

Elsewhere, coal prices eased and the Eurasian Natural Resources Corporation extended its losses, down 9.36 per cent or 110p at 1,065p. Antofagasta was down 49p at 568p and Vedanta Resources lost 102p to 1,982p.

On the FTSE 250, Taylor Wimpey dominated the headlines. The stock slumped by 41.67 per cent or 25p to 35p after the house builder said it had been unable to secure funding, scrapped its first-half dividend and announced the departure of its finance director, Peter Johnson.

"The statement could not be more grim," said Dresdner Kleinwort. The broker removed it price target for the stock, downgrading it to "sell".

Investors soon fled the sector and apart from Taylor Wimpey, Barratt Developments was the worst hit, down 29.07 per cent or 16.5p at 40.25p. Bellway was down 9.47 per cent or 39.5p at 3,77.75p, Bovis Homes lost 8.1 per cent or 25.75p to 292p and Berkeley was weaker by 6.34 per cent or 41.5p at 613p.

On AIM, Tanfield gained 0.62p to 6.15p after Investec, citing the recent de-rating of the stock, moved its recommendation to "buy" from "hold". The broker said: "While for most Tanfield will be too risky, for those brave enough, we believe there is value."