Market Report: Rolls-Royce boosted by bright 2011 outlook

It looks set to be a cheerful festive period for Rolls-Royce following a torrid couple of months, as the engineering giant was tipped to enjoy a strong 2011.

The company has struggled since the start of November, when one of its engines exploded on a Qantas plane, but yesterday it moved up 13p to 650p thanks to support from brokers.

It was also helped by Skymark Airlines, which said there was a "fair possibility" the group's engines would be chosen for the four Airbus A380s the Japanese carrier has already ordered.

Citi's analysts upgraded the engineering giant to a "buy" recommendation with a target price of 760p, and they described the engine failure as "one-off in nature, with limited long-term impact".

Predicting a continuation of positive earnings momentum next year, the broker said its "positive stance... is consistent with our upbeat view on civil aerospace in 2011, driven by aftermarket recovery and rising deliveries".

Deutsche Bank was less keen, keeping its "hold" advice, but it did increase Rolls-Royce's target price to 665p. The broker described the engine issues as "manageable", but warned that it "creates an overhanging risk which is hard to value and could lead to periods of unwelcome newsflow continuing".

In a large note on the aerospace and defence sector, its analysts highlighted Meggitt as one of its top picks, and the aeroplane parts supplier saw a gain of 5.7p to 375.5p on the mid-tier index as a result.

Overall the FTSE 100 moved up 60.19 points to 5,951.8, setting another new year high and leaving the 6,000 mark within touching distance. The leaderboard was dominated by the miners, thanks to a rise in metal prices, with Anglo American the sector's best performer, up 131p to 3,272.5p.

Rio Tinto added 115p to 4,537p amid reports that the miner will increase its offer for Riversdale to around A$3.8bn (£2.45bn). Trading in its shares has been suspended ahead of what the Australian group said was an announcement regarding "a possible control transaction".

Topping the blue-chip index was Royal Bank of Scotland, which shrugged off a meeting between senior figures in the banking sector and the government on pay to advance 1.72p to 40.18p.

It was plain sailing for the world's largest cruise company Carnival in the wake of its fourth-quarter earnings, which showed that its revenue had risen 6.6 per cent. The group jumped up 104p to 2,905p after it forecasted an increase in earnings per share.

Aggreko was left in last place, losing 46p to finish on 1,524p. The generator supplier surged onto the leaderboard on Monday following the announcement that it would provide power for the London 2012 Olympics, but it fell back yesterday as Credit Suisse reduced its target price by 60p to 1,660p and said it sees "more value elsewhere".

BT dropped 1.3p to 185.8p after Ofcom said the telecoms group had fallen foul of competition law, which it denied. Admiral was also among the fallers – edging back 8p to 1,553p – as chatter over Zurich Financial being interested in the insurer faded away.

The biggest faller on the FTSE 250 was SuperGroup, which was knocked back 73p to 1,261p on what was its sixth straight day of sliding. The clothing company has now lost more than 20 per cent since it warned of a potential drop in gross margins when releasing its first-half figures last week.

It was not the only retailer to suffer, as the snow continued to disrupt Christmas shoppers and the latest Gfk NOP Consumer Confidence Index showed consumers' optimism over the economy and their personal finances falling. Of Supergroup's peers, Mothercare declined 4.5p to 610.5p while Home Retail was knocked back 2.1p to 190p.

Also down near the bottom was CPP, despite it predicting "strong growth" in a trading statement. Both Peel Hunt and Canaccord Genuity downgraded their advice to "hold", and the insurance group fell 5p to 300p.

There was speculation doing the rounds that Drax is being targeted for a potential takeover, with a bid in the region of 450p and 500p-a-share supposedly being mulled over. A nameless private equity group was being talked about as making the move, as the power station group made 6.6p to close on 377p.

Small-cap company Xcite Energy had only just released its latest update from its Bentley field in the North Sea on Monday, but yesterday it revealed even bigger news – its oil well test had been successful. The group soared up 62.5p to 381.5p after it said that the daily flow rate of the well in question had been found to be around 2,900 barrels.

Elsewhere, Wincanton was 9.25p stronger on 169.25p as market gossips floated vague speculation that Stobart is considering a bid for the transportation company worth between 220p and 240p a pop. Yet disbelieving traders were quick to pour cold water on the chatter, with one pointing out the group's large amount of debt.

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