Market Report: GKN bolts ahead on City thumbs-up

The stock market stalled yesterday but car and plane parts maker GKN was in the fast lane as City analysts tipped the group as a winner.

Redditch-based GKN, which supplies car and plane parts around the world, is expected to return to volumes last seen before the financial crisis and analysts at Société Générale said this improved growth could equate to a 28 per cent jump in earnings.

The analysts argued the recovery in Europe “would further improve top-line momentum”, which is already buoyant because of a return to stronger demand for cars in the US.

UK car figures have also been positive. Not only are we buying lots more cars but the aerospace sector isn’t looking too bad either, SocGen pointed out. It predicted margins should benefit from “both a more disciplined approach to pricing and cost savings from recent restructuring”.

The Footsie took a breather and even the staggeringly successful investor Warren Buffett, warned that he is finding it difficult to buy shares.

The 83-year-old Sage of Omaha, who has run Berkshire Hathaway for more than four decades, lamented: “We’re having a hard time finding things to buy.”

The investment star made his comments after the US Federal Reserve decided not to start tapering quantitative easing yet. Mr Buffett’s strategy of value-investing has been harder to pull off. As stock markets surged in London on Thursday, he said shares “were very cheap five years ago, ridiculously cheap, and that has been corrected”.

Investors in the UK agreed as yesterday’s buying spree turned into profit-taking. The FTSE 100 declined 28.96 points to 6596.43.

European equity traders were also cautious ahead of the German election at the weekend and there was some concern after comments from US Federal Open Market Committee member James Bullard when he said the Fed may start winding down the quantitative easing at the October meeting.

Despite the wider market taking a break from buying, some traders were pushing the rumour that oil giant BP is being eyed by US rival Exxon Mobil. The spurious talk accompanied a 1.95p rise to 442.05p for BP.

Analysts at Citi took a good look at the discount supermarket businesses of Lidl, Aldi, Farm Foods and Iceland in the UK, and decided the big four supermarkets should up their game to compete in the long term. Citi’s experts said that although the “notion that Tesco… ‘goes nuclear’ and bludgeons the discounters on price” is not realistic, some supermarkets have reinvented themselves like “Kroger in the United States” so the UK’s players should consider how to adapt. Citi said that although Sainsbury’s, Tesco, Morrisons and Asda “cannot jump from the burning platform together and enact a Kroger-like transformation”, they should take a look at how successful the discounters are. Despite the warnings, Citi upgraded Sainsbury’s to neutral from sell ahead of its second quarter update next month. Citi raised its target price to 400p from 350p and it was 5.4p better to 396.4p.

Mid-cap insurer Direct Line rang off 8p to 210p after state-backed Royal Bank of Scotland raised £630m by selling a 20 per cent stake in the group. The buoyant first day of stock market trading for Foxtons lifted fellow estate agency Countrywide 12p to 570p. Brokerage group Icap slipped 18.5p to 391.2p when Bank of America Merrill Lynch downgraded it to neutral and reports on details of a fine coming next week for its part in Libor rigging.

Canaccord Genuity’s fashion followers forecast that a strong trading update from Asos earlier this week “should provide confidence in a strong start to the… season for SuperGroup”. Canaccord’s analysts said the fashion group that owns the Superdry brand is “too cheap for premium growth”, and rated it a buy with a 1,500p target for shares that were 2p better at 1,171p.

On AIM, Trading Emissions, which invests in tradable environmental permits, said its Brazilian subsidiary had warned that its Bionasa Combustível Natural business has been “experiencing severe financial difficulties”. Trading slipped 2.5p to 18.1p.

Gulf Keystone Petroleum revealed that non-executive John Bell has bought 72,200 shares at a price of 201p and it was 9.25p better at 209.25p.

Skyepharma was boosted by news that its Flutiform lung treatment has been approved in Japan and it was 10.125p healthier at 95p. Malaysian mobile messaging software group Macromac closed its first day of trading on AIM up 4p at 15p.

Buy

Restaurant Group

Gobble up shares in Restaurant Group, Canaccord Genuity suggests. The house broker thinks the group’s planned investment in its new brand and management structures bodes well for growth which it thinks will accelerate over the next few years. Canaccord rated it a buy with a 650p price target for the group, which owns restaurant brands including Frankie & Benny. The shares are 540.5p.

Sell

Royal Bank of Scotland

Flog shares in Royal Bank of Scotland, Investec insists. The broker notes that RBS sold a 20 per cent stake in Direct Line and raised £630m. But Investec thinks the biggest issue for the state-owned bank is its “declining core profitability.” It rates RBS a sell with a 345p price target for shares that are 364.4p.

Hold

Vedanta Resources

Hang on to Vedanta Resources, Liberum Capital advises. The broker thinks that with so much political uncertainty in India, it is a risk investing in companies exposed to the country. But it remains optimistic of a lifting of the iron ore export ban which is currently in place rates miner Vedanta a hold for now with shares that are 1,116p.