Market Report: Cobham, Ultra move up as Footsie bounces at last

Toby Green
Wednesday 10 August 2011 00:00 BST

With traders breathing a sigh of relief last night as the FTSE 100's losing streak was finally brought to an end, Cobham and Ultra Electronics were shooting up the mid-tier index after city scribblers said they were both well placed to weather the storm facing the defence companies.

The mood around the sector has been rather downbeat of late thanks to government penny-pinching across the globe, and the gloom intensified earlier in the month when the US signed up to cuts to its defence budget of at least $350bn over the next decade as part of the recent deficit reduction agreement.

Yesterday, however, some optimism emerged for both Cobham (up 4.4p to 181.3p) and Ultra (up 33p to 1,390p) as analysts said they were better prospects than their larger peers, thanks in part to their attractiveness as takeover targets.

Upgrading its advice on the two to "buy", Goldman Sachs praised their "strong niche positions" and said that as a result they "could, in our view, be acquired by larger defence companies." As well as talking up their dividend cover and balance sheets, the broker also pointed out that "while neither company is immune to defence cuts, both have a diverse contract exposure and are less vulnerable ifsingle large programmes are cut."

The analysts were less positive on BAE Systems, however, reiterating their "sell" recommendation and saying it has "poor growth prospects and will continue to earn below average sector returns". Société Générale did not help by cutting its price target to 280p from 360p, and the blue-chip group managed to edge forwards 0.2p to 256.2p only after a seven-day stretch in which it has lost nearly 17 per cent of its share price.

After seven straight sessions on the slide, in which it lost more than 800 points and fell to its lowest level for 13 months, the FTSE 100 finally managed to finish ahead yesterday despite briefly entering bear market territory in early trading as it touched a low of 4,791.01 points.

Spirits were raised by vague chatter that the US Federal Reserve – which was due to reveal its latest policy statement yesterday evening – could announce a third round of quantitative easing, and although market voices were refusing to get too excited over the talk, it helped lift the top-tier index 95.97 points to 5,164.92 – a swing of nearly 8 per cent over the day.

Key to the bounce were the miners, with Xstrata rising over 16 per cent from a session low of 900.4p to close 72.2p ahead at 1,042p. Meanwhile, Rio Tinto rallied 160.5p to 3,548p after Citigroup picked the company as one of its "conviction ideas", as the broker's analysts working out what risks were priced in after the sector's recent falls.

"We calculate that most outcomes are already in the shares, except a 'worst case' outcome where commodity prices fall to the same levels seen in the first-half of 2009", they said, adding that therefore there was "limited further downside".

There was no such advance for the banks, however, with Royal Bank of Scotland leading the way down. Driven back 1.05p to 26.21p, a new two-year low, Lloyds Banking Group – down 0.7p to 32.12p – was also weaker, although HSBC increased 7.2p to 545p.

The worst hit on the FTSE 250 was Greggs, after the baker revealed its first-half pretax profit had dropped by more than £1m to £17.3m, blaming trading conditions "more challenging than we had expected". The company, which said nearly 20 shops had been closed because of the previous night's riots, was downbeat on the chances of an improvement for the rest of the year, as it slumped 27.5p to 454.5p.

At the opposite end, Thomas Cook soared up 7.84p to 53.35p after losing nearly 16 per cent on Monday. Traders said the troubled tour operator was helped in part by a positive reaction to reports that one potential candidate to become its new chair is the current deputy chairman of Marks & Spencer (up 4.1p to 329.8p), Sir David Michels.

Elsewhere, vague speculation that, in the wake of the US group FISwithdrawing its approach last week, private equity could now make a move for the software company helped Misys shift forwards 9.5p to 258.7p.

Although the latest housing market survey from surveyors revealed the number of sales in July had hit atwo-year low, Barratt Developments managed to tick up 1.2p to 80.4p after Panmure Gordon said there was "evidence of good value within the quoted housebuilding sector" and that the group was its top pick among its larger peers. The broker also upgraded Persimmon's rating to "buy", as it closed 8.2p stronger at 393.8p.

Down on the Alternative Investment Market, the return of vague bid rumours around Berkeley Mineral Resources helped it rocket up 20 per cent, moving forwards 0.45p to 2.7p.

There was an even bigger surge of almost 50 per cent for Rockhopper, which shifted 68p to 209p after the Falklands oil explorer revealed positive results from an appraisal well.

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