Market Report: GKN hit by fears over strong raw material prices

Worries that the continuing strength in raw material prices will hit profits at GKN hard weighed heavily on shares in the engineer yesterday. GKN finished the session down 7.75p to 239p and brokers traced the sudden anxiety to surround the stock to a warning from its Swedish rival Autoliv.

Worries that the continuing strength in raw material prices will hit profits at GKN hard weighed heavily on shares in the engineer yesterday. GKN finished the session down 7.75p to 239p and brokers traced the sudden anxiety to surround the stock to a warning from its Swedish rival Autoliv.

Autoliv, which also makes car parts, complained that the impact on its earnings in 2005 of strong raw material prices will be double what it had originally anticipated. So although the Swedish group is enjoying solid sales growth, its profit margins will be flat in the first quarter of the year.

This does not bode well for GKN and Credit Suisse First Boston was one of a number of brokers to urge its clients to exit the stock. It noted that copper and steel, which are important materials for car parts manufacturers like GKN, continue to trade at all-time highs and so downgraded its earnings forecasts for the group by 8 per cent. To those hoping that a takeover bid will soon emerge for GKN, CSFB warned that the engineer's sizeable pension fund deficit will act to deter any predator in a big way.

Meanwhile, Virgin Mobile was undermined by a downgrade at Goldman Sachs. Cutting back its rating to "in-line" from "outperform", the US broker pointed out that shares in the mobile phone group have soared by 60 per cent since October, leaving them trading at a premium to its larger rivals Vodafone and mm0 ₂. Although Goldman expects Virgin to deliver higher growth rates than the rest of the sector, it takes the view that this is now adequately reflected in the company's stock price.

The FTSE 100 failed to register its third day of gains in a row and ended the week on a negative note, falling 20.6 points to 4,832.8. A weak start to trading on Wall Street was largely to blame for the change of sentiment. Amvescap gained 14.5p to 328.75p on talk that the French bank Societe Generale is about to table a bid for the fund manager. The consumer goods sector was buoyed by news of Procter & Gamble's $55bn takeover bid for Gillette. Panmure Gordon tipped Reckitt & Benckiser, up 42p to 1,582p, as a likely target, while SSL International, which has long been talked of as a being on the verge of being acquired, rose 4.75p to 324.75p.

The venture capital giant 3i added 17.5p to 691p as UBS moved its best clients into the stock, telling them that £200m worth of asset sales are on the way over the next six months. UBS raised its estimate of 3i's net asset value and suggested the disposal of interests in Travelex and Yellowbrick Road could soon be on the cards.

In the logistics arena Exel, up 15.5p to 785.5p, was again talked of as a target for the American postal giant UPS. The rumours follow comments by UPS's chief financial officer, Scott Davis, who seemed to hint that the company is eyeing acquisition opportunities. "We certainly have the capacity from a management standpoint and from a cashflow standpoint to do large acquisitions," he is reported to have said.

Elsewhere in the sector, Christian Salvesen jumped 3.75p to 58.5p after a buy order of 7.2 million shares was settled at 58p. This stake is equal to a 3 per cent holding in the company while the 58p price at which it crossed the market was well above the going price at the time. The trade immediately got traders speculating about the possibility of an offer emerging for the company. Over the years Christian Salvesen has been the subject of several takeover approaches. On each occasion the group rebuffed the offers and judging by its subsequent performance those doing the bidding have had a lucky escape.

Woolworths rose a further 0.75p to 40.5p as traders continued to bet on a takeover of the discount retailer. Evolution Securities believes Woolworths is a great each way bet for 2005. "Either the retailer will recover this year or it will get taken over by a Tesco, Asda or a private equity fund," the broker argued yesterday.

European Colour soared 3.5p to 17p as Peter Gyllenhammar, the Swedish value- investor, raised his stake in the dyes group from 8 per cent to 9 per cent. Mr Gyllenhammar has a great track record of making money from European Colour. Back in 2003 he built up a 29 per cent holding in the company at an average price of 20.5p a share, only to quickly sell it to Shelby Corporation, an investment company, at 28.5p and bag a £1m profit.

At UBC Media, unchanged at 27.5p, its chairman Michael Peacock bought 20,000 shares at 27p. Amstrad rose 3p to 175.5p on whispers the electronics group will soon post a solid set of results. Sales of its set-top-boxes and e-mailer product are said to have been strong.