Market Report: Smiths grounded after airports boost

Smiths Group fell prey to a round of profit-taking last night as traders moved to secure recent gains, believing that the potential boost from the scramble for airport scanners might prove to be relatively limited.

The engineering company's stock has been under the spotlight since the failed terrorist attempt to blow up a US-bound airliner on Christmas Day. Smiths is a leading player in airport security systems, and traders piled in amid the subsequent focus on full body scanners for passengers at airports around the world. The prospect of higher demand and stronger earnings drove the stock from 980.5p at the close on Christmas Eve to 1069p on Monday – a rise of about 9 per cent over three-and-a-half trading sessions.

The hopes were hit after Citigroup weighed in on the matter, arguing that, with the detection business representing 19 per cent of Smiths's overall sales, the impact on group earnings was "unlikely to be more than 3 to 4 per cent per annum in what we see as an optimistic scenario". The estimate, which was based on a five-year roll-out of full body scanners across a large portion of airports, sparked a pullback in the share price, with Smiths retreating by almost 3 per cent, or 31p, to 1038p despite Citi retaining its "buy" stance on the stock.

Recent events served to reinforce "the continued drivers for increased security that should support the detection business", Citi said. They might also offer some short-term reassurance given the "uncertainty over the second half outlook in the lumpy detection business after strong first half growth", the broker added, keeping its target price for Smiths unchanged at 1100p.

Overall, the markets supplemented earlier gains, with the FTSE 100 hitting a fresh 16-month high. The index touched a session high of 5,536.38 before relaxing to 5,522.5 to close 22.16 points higher on the day. "The next target traders are eyeing for the index are the highs up about 5,650 from August 2008 – just before the banking crisis really exploded and drove markets sharply lower," said Tim Hughes, head of sales trading at IG Index. "Sentiment still seems strong and we may not have to wait too long to see this major hurdle tested."

The FTSE 250 was also in buoyant mood, rising by 46.98 points to 9,557.09 amid continued optimism about the prospects of recovery. Renewed weakness in the US dollar also played its part in the rally, with the greenback's losses driving metals prices, which in turn supported the heavily weighted mining sector. On the FTSE 100, for instance, Fresnillo advanced by almost 3 per cent, or 23p, to 823p, while Xstrata rallied by 2.2 per cent, or 25.5p, to 1188p.

Banking stocks remained strong, with Royal Bank of Scotland, up more than 10 per cent, or 3.3p, at 35.4p enjoying another rally. The stock had climbed by almost 10 per cent on Monday after Exane BNP Paribas highlighted the buying opportunity presented by losses over recent months. Traders said the view had rekindled investors' interest in the shares, which were the worst performers on the FTSE 100 last year.

In the wider sector, Lloyds Banking Group was 3.4 per cent, or 1.77p, stronger at 54.03p, and Barclays rose more than 6 per cent, or 17.55p, to 298.1p. Barclays received some words of support from MF Global, which labelled it a "top pick for 2010". "Barclays trades below tangible book value and yet is profitable, which appears to us to be a significant mis-pricing of the shares," the broker said. HSBC was 10.5p ahead at 737p after Barclays Capital began covering the stock with an "overweight" stance and a 900p target price.

On the downside, the retail sector was under pressure amid profit-taking after Next, down 39p at 2100p, said its sales in the run-up to Christmas were better than expected. It struck a cautious note on the outlook for 2010, however, saying it did not "necessarily expect the year ahead to be as good as the previous six months, partly because the fall in interest rates will annualise in the first quarter". In the wider sector, Marks & Spencer, which is due to update the market this morning, was 7.5p weaker at 404.9p.

Further afield, the aerospace group Meggitt, down 0.5p at 271.5p, was in focus following some positive comment from Deutsche Bank, which said the stock was a "compelling" play on the aftermarket, the period following the sale of planes. "Aftermarket activities are on the path to recovery," Deutsche said, reiterating its "buy" stance. "Air traffic and the number of parked aircraft bottomed out during the first quarter of 2009 and destocking – which hurt the group's aftermarket revenues in the first half of 2009 – is gradually reducing."

Panmure Gordon lifted sentiment around Bovis Homes, which was 4.5p ahead at 421.9p after the broker reiterated its "buy" rating. "Aside from its already strong land bank, Bovis also has one of the strongest balance sheets in the sector, with a forecast year-end net cash position of £90.6m," Panmure said. "It is well placed to react and take advantage of opportunities in the land market that might occur in the coming months, which should add value and drive growth as the market recovers."

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