Market Report: Vodafone falls after UBS fears earnings drop

Vodafone lagged behind last night, closing at first place on the Footsie loser board after UBS issued short-term "sell" advice.

The broker, which moved its recommendation on a 12-month view to "neutral" from "buy", with a revised 115p target price, compared with 150p previously, said "deteriorating fundamentals and earnings momentum" could result in the telecoms group becoming a "classic value trap".

"Excluding last year's tax gain, we expect earnings to decline 11 per cent this year. We think the upcoming KPIs [key performance indicators] are likely to show deterioration across the board, with the European businesses seeing a revenue decline of 5.5 per cent," UBS said, adding that while the valuation appeared compelling, the group's free cash flow (FCF) dividend cover was inferior relative to peers.

A more positive assessment from Morgan Stanley, which reiterated its "overweight" stance, albeit with a revised 170p target, compared with 175p previously, and Citigroup, which said "buy", was not enough to offset the impact of the UBS circular. As a result, at the close, Vodafone was down almost 2 per cent or 2.2p at 112.8p.

Overall, the FTSE 100 was strong, rising to 4,237.68, up 35.55 points, while the FTSE 250 strengthened to 7,411.09, up 132.29 points. The benchmark, although firm, closed off session highs, following a weak start on Wall Street, where leading indices traded lower on the back of data evidencing weak consumer demand. American financial stocks also proved a drag in early trading, falling back as investors moved to bank profits following a better-than-forecast quarterly earnings report from Goldman Sachs, the investment banking giant.

Fresnillo, the world's largest primary silver producer, was the strongest of the blue chips, vaulting to 533p, up 13.3 per cent or 62.5p, as investors waded back into the mining sector, which was left directionless in the session before. Lonmin, the platinum producer, was just behind, rising to 1,077p, up 9.3 per cent or 92p, while the Kazakh mining groups Kazakhmys and Eurasian Natural Resources Corporation climbed to 640.5p, up 8.4 per cent or 49.5p, and 717.5p, up 4.7 per cent or 32.5p, respectively.

Anglo American was also strong, gaining almost 3 per cent or 49p to 1748p, as Investec said that the group was likely to wait until the new chairman takes over next month before seeking a Takeover Panel "put up or shut up" deadline for Xstrata, which climbed to 614.3p, up 5.4 per cent or 31.3p. "This would fit in with our assumed time line of early August, leading to Xstrata having to 'put up or shut up' by the end of September," the broker said.

Also on the upside, London Stock Exchange managed to stay afloat, rising by 18p to 652.5p, despite some negative comment from Bank of American Merrill Lynch. The broker reiterated its "underperform" recommendation on the stock, albeit with a revised 590p target price, compared to 470p previously, citing concerns about rising competition, which in its view "may cap any growth rebound impact from higher index levels."

A disappointing update from Q-Cells, the world's largest solar cell maker, undermined sentiment around FTSE 250-listed PV Crystalox Solar, which retreated to 76p, down 4.4 per cent or 3.5p. Elsewhere, vague rumours of bid interest from Stagecoach, up 1.5 per cent or 2.5p at 129.25p, drew punters into National Express, which rose 1.23 per cent or 3.5p to 287.5p.

The speculative feature of the day was Heritage Oil, the oil explorer which last month announced plans to merge with Turkey's Genel Energy. Rumours in the market suggested that Genel may meet its match in Royal Dutch Shell, which was said to be considering a bid for Heritage. At the close, Royal Dutch Shell was 4p higher at 1,469p, while Heritage, powered by the bid rumours, swung to 490.25p, up 11.4 per cent or 50.25p.

Dunelm, which was higher after posting a positive trading update in the session before, fell back amid a round of profit-taking, easing to 235p, down 0.75p. Analysts remained positive, with UBS moving the stock to "buy" from "neutral", and JP Morgan raising its target price to 230p, compared to 205p previously.

Investec, which raised its earnings estimates for the out-of-town homewares retailer, also turned positive, moving Dunelm to "buy" with a revised target price of 265p, compared to 250p.

Further afield, Marston's, the pubs group that lagged behind in the session before, recovered to 83.25p, up 4.4 per cent or 3.5p thanks to Goldman Sachs, which moved the stock to "neutral" from "sell", citing valuation. "Marston's is now valued in line with the sector, we therefore see the risk/reward as more evenly balanced," the broker said. "The rebased dividend looks far more sustainable at the revised level we forecast and the balance sheet leverage more manageable (despite plans to invest much of the proceeds)."

Goldman also weighed in on Robert Walters, the recruitment group, which closed at 139p, down 3.1 per cent or 4.5p, after the broker switched its stance to "neutral" from "buy", again on valuation grounds.